The fall of the royal dollar signals a respite for emerging markets. Comment by Crown Agents Bank

Emerging markets are always the hardest hit when it comes to US dollar fluctuations, so Crown Agents Bank is in a unique position to share some key insights on the impact not only in the US and larger markets, but also in other countries. Here are some thoughts from CAB Head of Forex Trading Charles Mangin on how the fall of the royal dollar signals a reprieve for emerging markets, and you can use them if you like:

“The Fed is expected to raise rates by 25 bp. next week after a 50 bp increase. in December 2022, and before that – by 75 b.p. The expected movement next week will be less significant than the increase we saw in 2022 as US inflation surged to a 40-year high.

“Despite more hawkish statements from Fed leaders over the past few weeks, current market sentiment is that inflation has plateaued and that the Fed is nearing the top of a tightening cycle. While the Fed’s current “party line” is that they won’t change course anytime soon and that the plan is to move higher and stay there longer, the market is looking for rate cuts later this year.

“If the Fed is indeed approaching the top of the tightening cycle, the US dollar will continue to move away from its highs and settle at significantly lower levels. In this case, emerging markets will benefit from stability.

“The value of the dollar for emerging markets cannot be overestimated. Local currencies were significantly weakened by the clear dominance of the dollar, and this negatively affected interest rates and bond markets. The anticipated future direction of US interest rates will play an important role in determining the possibility of further easing of tensions in emerging markets.

“The Royal Dollar has been weakening since October 2022 and this has relieved pressure on emerging markets as lower demand for US dollars led to more demand for emerging market currencies. Investors are attracted by the high-yield environment in these markets as a weaker dollar stabilizes local currencies.

“It is worth noting that these advantages are exacerbated by the state of affairs at the European Central Bank, as many emerging market currencies are pegged to the euro, especially in West Africa. The ECB, along with other central banks around the world, is lagging behind in its rate tightening cycles compared to the Fed. Given the high likelihood that the ECB will continue to raise rates and the subsequent strengthening of the euro, we expect emerging market currencies, especially in West Africa, to benefit.”

“In short, the fall of the royal dollar and the rise of the euro signal a reprieve for emerging markets, which have faced sharp swings in interest rates throughout 2022.”

Royal Dollar Falling Signals Postponement for Emerging Markets Comment from Crown Agents Bank first appeared on Fintech Finance.

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