Turkey’s currency panic reveals a major downside of ‘America First’

(Photo
by Getty Images)

• Turkey’s currency crisis has lurched on to the global
  stage, denting European and US stocks as fears of contagion
  rise.
• The country’s economy was already in trouble, but the
  lira’s selloff was heavily compounded by Donald Trump’s
  announcement that he was doubling tariffs on Turkish steel and
  aluminum.
• The boomerang market effect showed just how
  interconnected the global economy and markets remain, making it
  difficult for Trump to pursue an isolationist stance, and for
  the Fed to continue raising interest rates. 

Turkey’s currency crisis spilled loudly on to the global stage
Friday as other markets, including US stocks, took at hit from
concern about financial contagion to other countries and banks.

Turkey’s troubles, compounded by a new round of US sanctions, are
unlikely to cause any kind of permanent hit to US markets or its
economy, but it does offer two cautionary tales, one for
President Donald Trump and the other for Federal Reserve Chairman
Jerome Powell.

For Trump, it shows just how quickly his
“America First” isolationist agenda can bite back. There are
already ample signs that Trump’s aggressive anti-trade rhetoric
is
dampening global economic activity as trade wars heat up and
even risk morphing into
currency wars.

Trump further frayed US-Turkish relations
after the president announced via Twitter that he was
doubling of tariffs on exports of steel and aluminum from the
NATO ally,
shoving the Turkish lira down 18% in one day alone to a
record low against the US dollar. 

Markets
Insider

As a result of the ensuing panic, the dollar strengthened sharply
against major currencies as global investors sought a safe-haven,
something that runs directly against Trump’s professed efforts to
boost US manufacturing production and exports.

And what about the Fed, which is expected to keep raising
interest rates as early as next month? While many of Turkey’s
challenges are specific to that country, there are certain
characteristics — a heavy debt load following a prolonged, low US
interest-rate driven borrowing binge in dollars — broadly shared
throughout emerging markets.

South Africa’s rand took a sharp hit on Friday, over
heightened worries that country might be next to face similar
troubles to Turkey, like high inflation, an overheating economy
and a lack of
credible central bank independence.

While Fed officials are quick to stress they are focused on the
domestic economy, any emerging market slump large enough to spill
over into Europe or the United States would be significant enough
to give policymakers pause about ongoing monetary
tightening. 

That’s particularly true given US inflation has just hit its
target after a prolonged undershoot and wage growth that remains
stagnant.