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Washington DC – The head of the International Monetary Fund said Wednesday that central banks should refrain from intervening on currencies, suggesting instead that they use interest rate hikes as a preferred tool to combat currency weakness. against the dollar.
“Don’t waste your reserves to protect your currency,” IMF Managing Director Kristalina Georgieva said during an onstage discussion at the organization’s annual meeting in Washington DC “When your currency depreciates because from this inadequacy of the fundamentals, if you throw away your reserves to defend it, you will only gain a weak position for the future.
Emerging market currencies have been rattled by the strengthening dollar as the Federal Reserve raises interest rates to combat rising consumer prices in the United States Because so many countries are dependent on imports, rising local prices of international goods – often denominated in dollars – has triggered inflation crises around the world. A stronger dollar also makes it harder for emerging countries to repay dollar-denominated debt, since taxes are generally assessed in the local currency.
These currency fluctuations are closely watched by some bitcoin traders, as the price of the largest cryptocurrency is inversely correlated to the strength of the US dollar in the forex markets.
“Don’t fight a battle you can’t win”
Georgieva noted that some countries have raised interest rates to keep pace with Fed hikes. In general, when a country has a higher interest rate, its domestic bonds are more attractive to global investors, a dynamic which in turn leads to a stronger exchange rate.
The Bank of Mexico, for example, raised its interest rate for the 11th time in September in a bid for a range of 8.5% to 9.25% in an effort to tame inflation which is currently at 8.8%, slightly higher than in the United States. As a result, the Mexican Peso (MXN) held up well against the US Dollar (DXY) against other emerging market currencies.
“We actually saw a number of emerging markets that were quite proactive in assessing where the economy was heading and raising interest rates ahead of the Fed,” Georgieva said.
The Colombian peso, on the other hand, fell recently after the Colombian central bank announced a lower than expected rate hike.
“In fact, what she says is very important,” said Dick Bove, chief financial strategist at Odeon Capital. “She’s basically arguing that the Fed isn’t going to easing and the dollar is going to keep going up. So don’t fight a battle you can’t win.
Because the US dollar is the world’s reserve currency, the Federal Reserve is by default “the central banker of the world”, argues Bove, which means that if the Fed tightens, all the other major central banks must follow suit if they want the currency of their country. remain at the same level as the dollar.
The baffling question of how central banks react to a strong dollar could become a factor in crypto markets, albeit indirectly. Bitcoin (BTC) is inversely correlated to dollar strength in foreign exchange markets, so if central banks retaliate against weakening exchange rates, the cryptocurrency could benefit.
There is also speculation going back years in crypto circles that people in emerging markets may turn to digital assets like bitcoin as a safe haven if they see high inflation or economic turbulence in their home country. origin.
