“True, the immediate U.S. market reaction to the European and UK rate hikes, which came alongside similar moves from Denmark and South Africa, was relatively muted.
But longer term, market experts contend a transition to higher rates in Europe and Asia that happens while U.S. borrowing costs stay put could have wide-ranging implications for financial markets. Most believe the dollar would be the first to take a hit.
“The U.S. rate cycle is nearing its end, whether or not the Fed pauses next week, and that comes with more pronounced tightening to come in Europe and Japan,” said Alex Beuzelin, senior market analyst at Ruesch International in Washington, D.C. “That opens the door for the dollar to trend lower over the final months of 2006.”
When it does, other assets like stocks and bonds denominated in dollars could also get hurt. But even more worrisome is the prospect that the carefully calibrated efforts of global central banks could be based on erroneous measurements
Policy-makers themselves are quick to admit that interest rates are a blunt tool. Overshooting tends to be the rule rather than the exception, although in the case of the United States, economic growth is usually sufficiently resilient to prevent a prolonged slump.
But this strength is untested in a truly interlinked world economy where geopolitical risks abound.
With most central banks around the world tightening monetary policy simultaneously — one analyst cited a ratio of nearly five rate hikes for every rate cut so far this year — the risk that the global economic behemoth will stumble to a halt is perhaps larger than ever before. The hangover from a prolonged period of easy money could be a rough one this time.”
