Strong US dollar and its impact

The US dollar has been strong since the Fed announced its plan for rate hikes, and the appreciation of USD is also contributed by the increasing world tension and the strong US economic performance. USD is appreciating mainly against the EM currencies, including the Chinese currency, Renminbi. The appreciation of USD can have impacts on the EM economic performance.

Many EM economies rely on the US economy to generate their own economic development. The US administration is currently attacking the issue of its trade deficit and some of these EM economies are generating economic development by producing exporting products for other countries, especially the US. While the US administration increases its tariffs on the imports, these EM economic performances will be hurt by this action.

Strong US dollar could potentially improve these EM's exporting businesses, as their products become cheaper; however, such impact can be cancelled out by the impact from the increasing tariffs. Moreover, these EM economies need US dollar reservations to maintain their credibility. Once these economies cannot get sufficient US dollar reservations, their credit ratings are likely to be lowered, then they will become more difficult to borrow money to leverage up their economic development. In addition, if these economies already have very high leverage ratios, they have to keep borrowing for rollover to continue their businesses and economic development. The appreciation of US dollar definitely increases the difficulty for these EMs to raise sufficient US dollar reservations. Furthermore, the major buyer of the US Treasury bills, China, has shrunken its holding of the US Treasury Bills.

To conclude, when US dollar is appreciating, the EM economies may find it more difficult to raise sufficient US dollar backed assets to maintain their credit ratings.