Dollar rally to hit emerging markets, warns bank

Global financial policy makers have sounded the alarm about the impact of a resurgent US dollar on emerging markets, where companies have racked up large debts denominated in the American currency.

The Bank for International Settlements, known as the central bankers’ bank, warned yesterday in its Quarterly Review that a prolonged rally in the dollar could expose financial vulnerabilities in emerging markets by damaging some companies’ creditworthiness.

The Basel-based organisation said there were increasing signs of fragility in financial markets, despite renewed hopes for growth, pointing to the recent stress in the $12.3 trillion US treasury market that serves as the bedrock of the global financial system.

Growing fragility

“To my mind, these events underline the fragility – dare I say growing fragility – hidden beneath the markets’ buoyancy,” said

Claudio Borio

, the head of the BIS’s monetary and economic department.

The dollar hit post-recession highs against some currencies on Friday after a report showing 321,000 jobs had been created in November.

Emerging market companies have been borrowing heavily via the issuance of dollar securities, a phenomenon the BIS has been following closely.

Dollar debt

It said emerging market borrowers had issued a total of $2.6 trillion of international debt securities, of which three-quarters were denominated in dollars. International banks’ cross-border loans to emerging market economies amounted to $3.1 trillion in mid-2014, mainly in US dollars, the BIS added.

Mr Borio said: “Should the US dollar, the dominant international currency, continue its ascent this could expose currency and funding mismatches by raising debt burdens. The corresponding tightening of financial conditions could only worsen once interest rates in the US normalise.”

Flows of credit across borders have risen substantially for the first time in three years, the report also found.

– (Copyright The Financial Times Limited 2014)