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US Fed rate hike: winners and losers in trade

Americas / 15-03-17 / by
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Cash flow currency US dollars

Today’s (March 15) Federal Reserve (Fed) decision to raise US dollar interest rates by a quarter point was widely anticipated, but not everyone is set to benefit from it.

Ahead of the hike, Fed chair Janet Yellen expressed confidence in the US economy and and its readiness to withstand interest rate increases in 2017.

With labour markets in good shape and core inflation slowly approaching the Fed’s target of 2%, Yellen said the risks to the economy were well-balanced, and suggested that the Fed’s “neutral” rate should be roughly equal to core inflation, meaning the rate could be headed for about 2% by the end of 2017.

“The Fed is playing catch-up on the economy. The economy was strong enough to justify a change in interest rates three months ago. I think the convulsive American election three months ago froze the Fed in place for months, and now they’re at the point where they have to act,” Patrick Anderson, CEO of research firm Anderson Economic Group, tells GTR.

A strong dollar could hurt the competitiveness of US exporters, but Anderson believes these are probably more concerned with the protectionist rhetoric being considered around the world.

“The issues about protectionism that have arisen are a bigger risk to international trade than a somewhat overdue adjustment in US interest rates,” he adds.

Latin American economies are most at risk of suffering the negative impact of the hike, as higher US rates could drain capital away from high-yielding emerging markets, affecting their currencies. In fact, most Latin American currencies weakened this week on the expectation of the rate increase.

deVere Group’s founder and CEO Nigel Green also warns investors that they should prepare for dollar swings. “In the short term, higher Fed rates will attract overseas capital into the US, especially to those sectors, such as energy and financials, that will most likely benefit from Trump’s policies. On the flip side, emerging markets will become less attractive because a strong dollar makes interest and repayment more costly in local currency.

“However, the strength of the dollar might weaken again in the coming months.  The markets are pricing in three hikes in 2017 – I think it will be two, which would result in a fall back of the greenback later in the year,” he says.

Green adds that despite the Fed’s reassurance that US inflation is healthy, he is “almost sure inflation is going to creep up on us”, and urges investors to prepare for a potential negative impact on the economy.

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