Trumping the global monetary system

It is difficult to know exactly what US president-elect Donald Trump will do when he takes office in January. But thanks to his vow to pursue tax cuts and increase infrastructure spending, financial markets expect faster growth in the United States - a perception that is boosting the dollar's exchange rate against most currencies, including the renminbi, and triggering capital flight from emerging economies.

Notwithstanding Trump's vow to impose tariffs of up to 45 percent on Chinese goods, a resurgent dollar will hurt the US' trade competitiveness, as according to the International Monetary Fund, the dollar was already about 10-20 percent overvalued in June.

And while trade is supposed to be the primary driver of exchange rates, capital flows have grown to the point that their role in guiding exchange rates is now much larger. In this context, market optimism about US growth could lead to ever-larger imbalances and possibly disrupt the international monetary system.