US Diesel Crisis About To Become Asia's Interest Rate Problem

Wednesday's PCE figures, the Fed's preferred inflation measure, came in softer than expected at 3.4% for the year to August, with core inflation at 3%. Some investors have taken this as a sign the Fed can relax, but we'd be wary of that reading.

The figures were published alongside changes to how several parts of the index are calculated, so it's hard to know how much of the improvement is genuine. Even taken at face value, 3.4% is well above the 2% the Fed is aiming for, and the diesel spike still hasn't fully fed into prices.

An export ban wouldn't solve much. It might ease prices in some parts of the US, though officials have been warned it could raise them in regions that rely on imported fuel.

It would certainly hurt Europe, where diesel prices are at record highs and people have taken to the streets over them. The administration has also floated asking China to produce more diesel. None of this does much to calm a global fuel market under strain since the war involving Iran began seven months ago.

Meanwhile, the dollar is close to its strongest level of the year, and US 10-year yields are above 5%. Both reflect expectations that the Fed has more work to do.

Asia buys most of its oil and fuel from abroad and pays for nearly all of it in dollars.

A stronger dollar makes those imports dearer in local terms even when global oil prices go nowhere. A trucking company in India or a fishing operator in the Philippines ends up paying more for fuel largely because of decisions made at the Fed.

Treasuries paying over 5% also draw in global investors, and some of the money that would otherwise go into Asian bonds and shares will head to the US instead. Those outflows weaken regional currencies further, which pushes import costs up again.

Asian central banks have limited room to maneuver. Raising rates to support their currencies and contain imported inflation risks slowing economies already struggling with high energy costs and holding back risks a sliding currency and fuel bills that climb even higher.

We'd expect several of them to lean towards tightening over the coming months, particularly those whose currencies have already come under pressure this year.

The impact won't be spread evenly. Exporters with dollar revenues benefit from weaker local currencies, and Asian refiners could pick up extra business if American diesel stops flowing abroad.

The economies most at risk are the big energy importers carrying a lot of dollar-denominated debt, and the Philippines tops that list.