Aggressive Fed rate hikes endangering Asian economies

On November 2, the US Federal Reserve raised interest rates by 75 basis points, stirring up finances around the globe. According to Refinitive Eikon, a website that provides information about international commodity exchanges, USDX has risen by 15% since the beginning of the year. A report at the United Nations Conference on Trade and Development also points out that for every percentage of the Fed rate increase, the economic output of other developed countries would drop by 0.5%, and that of developing countries by 0.8%. By bringing up the value of the US dollar, the rate hikes in 2022 alone can take $360 billion off the future incomes of developing countries, which, without doubt, is going to exacerbate the economic downturns in many Asian countries.

Emerging economies in Asia have always been ravaged by the dollar. Fed has been tightening its monetary policies since the beginning of the year. Under such circumstances, interest rate spread reduced the appeal of the markets in emerging economies, accelerating the redirection of capital flow from overseas markets back to the US. The surge in the value of the dollar contrasts sharply with what Asian currencies are experiencing. According to an Asian Development Bank report, by October, value of the Philippine peso had fallen by 12%, and that of the Indian ruppe and the Vietnamese Dong by 10% and 9%, respectively.

Yet there is nothing new under the sun. Economies around the world have always been plagued by the dollar. It is not the first time for Fed to consecutively increase rates, and in history such moves had brought considerable troubles to fragile emerging economies. In the 1980s, in order to offset its domestic inflation, Fed resorted to rate hikes, which eventually led to debt crises in Latin American countries. Later, in 1994, Fed entered another interest rate hike cycle, resulting in a massive financial crisis across Asia.

Unlike what happened in previous rate hikes, developed economies in Asia are not faring well this time, either. Japan, for example, is suffering the greatest shock. As J. P. Morgan predicts, Japan’s trade deficit in 2022 will reach a record 20 trillion yen. Now Japan needs to make a tricky decision: should it follow suit? If it raises rates to counter the impact of the Fed rate hikes, every percentage of the rate increase will end up in a 10 trillion-yen rise per year in its national debt. If it doesn’t, the yen will continue to depreciate against the dollar, and the huge interest-rate spread will prompt large-scale selling of Japan’s government bonds.

Now actions are being taken as countries across the world become increasingly aware of the danger of US dollar hegemony. As the biggest beneficiary of today’s international rules and global governance regime, the US should have taken the responsibility to revitalize global economy, but it has nonetheless exploited those rules to transfer its domestic crises to other parts of the world. The US has already made itself the biggest scourge in global economy, and it is high time that countries said “no” to its hegemony.