What happens in Vegas stays in Vegas.
What happens in China impacts the rest of the world.
China has recently cut its currency’s ties to the U.S. dollar in favor of a mixed bag of foreign currencies. This decision from the Chinese government comes after the announcement that the Federal Reserve most likely will raise interest rates and is yet another step in the on-going attempt from the Chinese to distance themselves from any backlashes due to changes in American economics. The yuan has been devalued and economic growth is in decline.
This move has drastically upset the international status quo and the impact can already be felt on the U.S. markets. If what’s happening in China would be an isolated event, the ripple effect would be negligible for the Fed, since exports to the eastern powerhouse only represent a measly percent of total domestic production. But the world’s second largest economy is rapidly becoming the main consumer of goods, and the slowdown is having a negative impact on Asian, European and South American markets, as well. The reaction was expected, but also much bigger than anticipated, according to a statement released by the International Monetary Fund. Experts warn that an unchecked development could spark a chain reaction of financial crisis in emerging nations, and that the U.S. and China need to put their differences aside for the sake of global economic welfare.
As usual, it’s all about the dollar. The U.S. dollar is generally considered to be the global currency of choice, and a strong dollar puts significant pressure on foreign companies that make their earnings in local currency while counting their outstanding debt in dollars. The latest fall in oil prices is a direct result of a dollar on the rise. While U.S. companies are losing billions, Asian and Russian operations are cashing in on the crisis because they are able to trade locally in their own currencies. They keep pumping like never before and the increase in supply has in turn affected the U.S. stock and commodity market.
As of today, the Fed is in listening mode, with a second raise already approved, only months after the central bank broke its zero policy in December last year – the first rate hike since before the Great Recession of 2008. China responded by letting the yuan drop and the reaction from nervous investors has lead us up to this point. The Fed is watching the Chinese market closely, ready to respond if a stronger dollar continues to disrupt its economic progression.
In this global economic climate, no nation is an island, and whatever policy the Fed chooses to implement to offset China’s financial condition, it has to do so in tandem with international market developments.