Not only would their rates have to adjust by at least the same amount as the United States, but they would face an amplification effect through the exchange rate. As the Economist explained, a “stock of dollar debt is like a short position,” i.e., a speculative position assuming that the dollar exchange rate will either remain level or fall.17 A Fed interest rate increase signaled not only higher borrowing costs but a likely upward movement in the dollar. Exposed emerging market borrowers would run to cover their dollar exposure, amplifying the currency adjustment and increasing the pressure
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