Rising US Dollar Exerts Pressure on EM Currencies
For decades, the growing US dollar has put pressure on emerging markets and, despite all the advances in the developing world in recent years, recent price movements show that much has changed. Emerging market (EM) currencies have lost about 3% in the past two weeks.
Dollar likely to keep rising versus EM currencies as developing-nation central banks have been reluctant to hike rates. Meanwhile, the latest US employment data release justifies Fed's tightening trajectory and USD strength. Ability for some emerging markets to pursue independent monetary policy is now being compromised because of the strength of the dollar. Some central banks and policymakers are trying to reassure investors about monetary policies.
Argentina has raised up its interest rates to 40% in response to a rout in its peso currency, while Turkey was also forced into a rate rise as its lira hit record lows against the US dollar. Indonesia has also said it could resort to policy tightening.
As emerging currencies fall almost everywhere, yields on bonds denominated in emerging market currencies are back up near 6.2%. Fund managers' profits have soared in this time, with emerging local currency debt among the best performing asset classes, with dollar-based returns of 14% last year. Even in the first quarter of 2018, returns were a buoyant 4.3%.