The unfolding US recovery is a good news story we should all cheer

One of its most visible consequences has been a strong rally in the US$, which has increased by 19% on a trade-weighted basis over the past year. Moves of this magnitude can have far-reaching consequences however. Years of quantitative easing have flooded capital markets with US$'s, many of which have been lent outside of America. BIS estimates that the amount of US$ denominated debt owed by non-financial borrowers in emerging markets has reached $4.5 trillion, more than doubling since 2009. As the US$ rises, servicing these debts in local currency terms becomes increasingly problematic. Emerging markets in general have improved their imbalances since past debt crises, yet given the amount of US$ denominated debt now owed, it seems optimistic to believe some dangerous funding mismatches are not developing. Countries like Turkey, South Africa and Brazil stand out in this regard. More broadly it would only take one significant default for markets to re-price emerging market risk in general. It's time to tread carefully in the emerging world.