Turkey’s currency crisis spilled loudly on to the global stage Friday as other markets, including US stocks, took at hit from concern about financial contagion to other countries and banks.
Turkey’s troubles, compounded by a new round of US sanctions, are unlikely to cause any kind of permanent hit to US markets or its economy, but it does offer two cautionary tales, one for President Donald Trump and the other for Federal Reserve Chairman Jerome Powell.
For Trump, it shows just how quickly his "America First" isolationist agenda can bite back. There are already ample signs that Trump’s aggressive anti-trade rhetoric is dampening global economic activity as trade wars heat up and even risk morphing into currency wars.
Trump further frayed US-Turkish relations after the president announced via Twitter that he was doubling of tariffs on exports of steel and aluminum from the NATO ally, shoving the Turkish lira down 18% in one day alone to a record low against the US dollar.
As a result of the ensuing panic, the dollar strengthened sharply against major currencies as global investors sought a safe-haven, something that runs directly against Trump’s professed efforts to boost US manufacturing production and exports.
And what about the Fed, which is expected to keep raising interest rates as early as next month? While many of Turkey’s challenges are specific to that country, there are certain characteristics — a heavy debt load following a prolonged, low US interest-rate driven borrowing binge in dollars — broadly shared throughout emerging markets.
South Africa’s rand took a sharp hit on Friday, over heightened worries that country might be next to face similar troubles to Turkey, like high inflation, an overheating economy and a lack of credible central bank independence.
While Fed officials are quick to stress they are focused on the domestic economy, any emerging market slump large enough to spill over into Europe or the United States would be significant enough to give policymakers pause about ongoing monetary tightening.
That's particularly true given US inflation has just hit its target after a prolonged undershoot and wage growth that remains stagnant.
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