Georgieva Warns Central Banks To Hoard Reserves And Follow Fed Hikes
The official’s remarks may be crucial to bitcoin traders, given the correlation between the biggest cryptocurrency and the dollar’s strength on foreign exchange markets.
Washington, DC: Wednesday, the director of the International Monetary Fund said that central banks should avoid from currency interventions and instead utilise interest rate hikes as their preferred weapon to address foreign exchange weakness against the dollar.
“Do not waste your reserves to protect your currency,” IMF Managing Director Kristalina Georgieva said during an on-stage discussion at the organization’s annual meeting in Washington D.C. “When your currency is depreciating because of this mismatch of fundamentals, if you throw your reserves to defend it, the only thing you’ll get out of it is a weak position for the future.”
As the Federal Reserve increases interest rates to counteract growing U.S. consumer prices, the surging dollar has roiled the currencies of emerging markets. As a result of the reliance of so many nations on imports, increasing local prices for foreign commodities – typically priced in dollars – have sparked global inflation. A rising dollar makes it more difficult for emerging market nations to repay dollar-denominated debt, since taxes are often levied in the local currency.
Some bitcoin traders actively track these foreign-exchange swings, since the price of the biggest cryptocurrency is negatively connected with the U.S. dollar’s strength on foreign-exchange markets. ‘Do not fight a battle you cannot win’
Georgieva said that several nations have increased their interest rates in lockstep with the Federal Reserve. In general, when a country’s interest rate is greater, its domestic bonds are more appealing to international investors, a dynamic that results in a stronger exchange rate.
The Bank of Mexico, for instance, increased its interest rate for the eleventh time in September to a range of 8.5% to 9.25% in an effort to curb inflation, which is now at 8.8%, slightly higher than in the United States. Consequently, the Mexican peso (MXN) has fared better versus the U.S. dollar (DXY) than other emerging market currencies.
Georgieva said, “We actually have seen a number of emerging markets that have been quite proactive to assess the direction that the economy was taking and increase interest rates before the Fe.”
In contrast, the Colombian peso recently declined when the central bank of Colombia implemented a smaller-than-anticipated rate rise.
“Actually what she is saying is very important,” said Dick Bove, chief financial strategist at Odeon Capital. “She is basically arguing that the Fed will not ease and that the dollar will continue to rise. So do not fight a battle you cannot win.”
Because the U.S. dollar is the world’s reserve currency, Bove believes that the Federal Reserve is by default “the central banker to the world,” meaning that if the Fed tightens, all other major central banks must do the same if they want their currency to stay at the same value as the dollar.
Indirectly, the confusing issue of how central banks would react to a high dollar might become an influence on cryptocurrency markets. Bitcoin (BTC) is negatively connected with the dollar’s strength on foreign exchange markets, so if central banks fight back against their declining foreign-exchange rates, Bitcoin (BTC) may benefit.
In crypto circles, there are also years-old rumours that individuals in developing regions may use digital assets like bitcoin as a safe haven if their native countries experience severe inflation or economic turbulence.
