Another round of extreme currency and bond volatility is on the horizon as the US Federal Reserve considers putting up interest rates.
The United States has had a rate of just over 0% since the closing months of 2008, but the latest minutes of the Fed’s last rate-setting meeting show the committee is split on when to move.
Some of the members believe the US economy is strong enough to stand alone with support from the Fed and want the rate to go up to around 1.5% to 1.7% by late 2017.
The first hike could come as soon as June, said the minutes.
The decision depends on how quantitative easing (QE) in Europe affects the US dollar.
Emerging currencies nosedive
The euro has gained value against the dollar since the European Central Bank started propping up the single currency zone economy by printing extra money.
Confidence has also improved this week with a pledge from the newly-elected Greek government to repay billions in bail-out loans over the coming weeks.
Meanwhile, in Britain, the Bank of England seems to have no qualms about continuing to peg the interest rate at 0.5%. The Bank’s monetary policy committee voted to keep the rate for at least another month.
How international currencies react remains to be seen.
When the Fed announced an end to QE in 2013, emerging market currencies nosedived.
This week has already seen the Brazilian Real lose value against the dollar and euro as a once thriving emerging economy worsens against a background of corruption, lack of faith in the president and political scandal.
The International Monetary Fund has warned emerging markets to ready for movement in the US dollar, Pound and Euro, which is likely to see currency devaluations in South America, Africa and Asia.
Investment experts forecast that central bank plans for rate hikes will also leave little room for bond rates to rise for fixed income investors.
Jeremy Roberts, Head of UK Retail Sales at BlackRock, said: “At least 20 central banks have eased off this year, leaving a shortage of high-quality, long-duration assets. Bond markets are in trouble as volatile rates and illiquidity are a fiery mix.
“It looks like the Fed and possibly the Bank of England will look to up their rates, which threatens the markets even more for bond investors.”