Emerging markets (EMs) always get hit the hardest when it comes to fluctuations in the USD – so Crown Agents Bank is uniquely positioned to share some key insights around the impact not just in the US and larger markets, but further afield.
Here’s a few thoughts from CAB’s Head of FX Trading, Charles Mangin, on how a falling King Dollar signals a reprieve for emerging markets – which you’re very welcome to use if you wish:
“The Fed is expected to raise rates by 25bp next week, following on from a 50bp increase in December 2022, and 75bp moves before that. Next week’s expected movement will be a less substantial increase than the hikes we saw over 2022 as inflation rose to a 40-year high in the US.
“Despite more hawkish talk from Fed leaders over the past few weeks, current market sentiment at is that inflation has plateaued, and that the Fed is getting close to the top of the rate tightening cycle. Although the current Fed ‘party line’ is that they won’t be altering course any time soon and that the plan is to go higher and stay there longer, the market is pricing in rate cuts for later this year.
“If the Fed is indeed getting close to the top of the rate tightening cycle, the USD will continue to move away from its highs and settle at significantly lower levels. In this case, emerging markets would stand to benefit from the stability.
“The value of the dollar to emerging markets cannot be overstated. Local currencies have been significantly weakened by the sheer dominance of the dollar and this has adversely affected interest rate and bond markets. The perceived future direction of US interest rates will play a major role in determining whether tensions in emerging markets can ease further.
“The King Dollar has been weakening since October 2022 and this has alleviated pressure on emerging markets, as lower demand in US dollars has led to increased demand in emerging market currencies. Investors are attracted to the high yield environment within these markets as a weakening dollar stabilises local currencies.
“It’s worth mentioning that these benefits are compounded by the state of play at the European Central Bank as many emerging market currencies are tied to the Euro, especially in West Africa. The ECB, along with other central banks globally, are behind the curve in their rate tightening cycles compared to the Fed. Given the strong likelihood that the ECB will continue to raise rates, and the subsequent strengthening of the Euro, we expect that emerging market currencies, especially in West Africa, will stand to benefit.”
“In short, the falling King Dollar and rising Euro signals a reprieve for emerging markets that have been challenged by dramatic interest rate fluctuations throughout 2022.”
