• The IMF warns of the potential impact of retaliatory tariffs on Asia's economic growth.
• The tariffs could disrupt global trade, hamper growth in exporting nations, and potentially raise inflation in the United States.
• The correlation between oil and currency, and recent banking sector turmoil expose financial stability risks.
• The IMF's warning highlights the need for careful policy decisions to promote economic growth while mitigating risks.

The International Monetary Fund (IMF) has recently raised concerns about the potential repercussions of retaliatory tariffs on Asia's economic prospects. The organization's Asia-Pacific Director, Krishna Srinivasan, voiced these concerns at a forum in Cebu. He highlighted the potential for tit-for-tat tariffs to disrupt growth prospects across the region, leading to longer and less efficient supply chains.

This warning comes amid concerns over U.S. President-elect Donald Trump's plan to impose a 60% tariff on Chinese goods and at least a 10% levy on all other imports. The potential impact of these tariffs is significant. They could impede global trade, hamper growth in exporting nations, and potentially raise inflation in the United States, forcing the U.S. Federal Reserve to tighten monetary policy, despite a lacklustre outlook for global growth.

The Impact of Tariffs and Global Economic Outlook

In October, the European Union also decided to increase tariffs on Chinese-built electric vehicles to as much as 45.3%, prompting retaliation from Beijing. The IMF's latest World Economic Outlook forecasts global economic growth at 3.2% for both 2024 and 2025, weaker than its more optimistic projections for Asia, which stand at 4.6% for this year and 4.4% for next year.

Asia is currently witnessing a period of important transition, creating greater uncertainty, including the acute risk of escalating trade tensions across major trading partners, Srinivasan said. The uncertainty surrounding monetary policy in advanced economies and related market expectations could affect monetary decisions in Asia, influencing global capital flows, exchange rates, and other financial markets.

The Correlation Between Oil and Currency and Financial Stability Risks

The correlation between oil and currency is a hidden string that ties currencies to crude oil. Price actions in one venue force a sympathetic or opposing reaction in the other. This correlation persists for many reasons, including resource distribution, the balance of trade (BOT), and market psychology.

The recent banking sector turmoil in the United States and Europe has exposed the trade-offs between raising policy rates and preserving financial stability. A decade of ultra-loose monetary policy and near-zero policy rates has encouraged excessive leverage in the financial sector. The sudden shift to higher interest rates has revealed asset-liability mismatches and exposed the financial sector to significant duration risks.

The Idea of a Global Currency

The idea of a global currency is not a new one. In 1969, the International Monetary Fund (IMF) created the Special Drawing Rights (SDR) as a supplementary global reserve asset. The SDR's value is based on a basket of five currencies: the U.S. dollar, the Japanese yen, the euro, the British pound sterling, and the Chinese renminbi. While the SDR is not a currency in the classic sense, it does serve the purpose of supplementing member countries' official currency reserves and providing liquidity during times of economic distress.