The currency crisis in Turkey is finally spilling over into the euro, which is finally breaking down. Not to worry, as we’ve been here before.
The complication, of course, is that CPI remains stubbornly high at 2.9%. This is dangerous territory and greatly exacerbates the difficulty the Fed faces in threading the needle of interest rate hikes.
As a net importer, the US needs dollar strength to keep inflation under control. But, continuing dollar strength could do untold damage to euro zone banks which are grappling not only with dollar-denominated obligations but with Turkish lira exposure.
Witness Deutsche which, try as it might to recover, is off over 6% today.
By working to establish a buffer for the next financial crisis, the Fed might have hastened its arrival.
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