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27 Aug 2018
Writer:

U.S. Dollar's Rise Puts Canada, Australia, New Zealand in Spotlight

Canada, Australia and New Zealand are rich countries, but currency traders are watching them with interest for signs of the sort of malaise that often hits emerging markets when the U.S. dollar is rising.

Only a few years ago, comparatively high-interest rates and solid economic performance made these countries a destination for investors seeking solid returns at a moderate risk. But rising U.S. interest rates are hitting their currencies and diminishing their attractiveness to overseas capital, an unwelcome development for economies that have relied increasingly on inflows of foreign investment to finance current account deficits.

The currency declines stand to add to existing weaknesses in these economies, which are driven in part by commodity exports and feature deep trade ties with China—another red flag as trade tensions mount.

While few expect Australia, Canada and New Zealand to suffer the type of shocks that have rocked Turkey and Argentina this year, the plight of the non-U.S. dollars underscores the risks associated with rising U.S. rates and dependence on global capital flows for financing.

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