US rate hikes could destabilise Yuan

The biggest risk to the global economy is the interaction between the US and China in the form of a rising $US. The risk is that if the Fed continues to raise rates, or does so too aggressively, at a time when the rest of the world including China is soft then upwards pressure on the $US will resume which in turn will push oil prices, other commodity prices and emerging market currencies down again and put more pressure on China to devalue the Renminbi which in turn will add to fears of capital outflow from China. All of which will add to the risk of a dollar funding crisis in the emerging world and a credit blow up amongst energy producers. Recently the risk of this occurring has receded as the Fed has backed off from further rate hikes and this has enabled China to stabilize the Renminbi versus the $US. But it's worth keeping on eye on.