A soaring US dollar, coupled with a confluence of bad news has triggered the most significant sell-off in emerging market currencies since the Federal Reserve’s aggressive rate hikes started two years ago.
The JPMorgan index has noted that the emerging market currencies have plummeted over 5 per cent in the last two and a half months which has set the stage for the steepest quarterly drop since September 2022.
This downturn has been widespread and with around 23 currencies being monitored by Bloomberg have depreciated against the dollar this quarter. The dollar has been on a remarkable rise since last September which is driven by expectations surrounding president-elect Donald Trumo’s potential implementation of extensive tariff and a loosening of fiscal policies upon starting his office next month.
Paul McNamara, the lead manager for emerging markt bonds and currencies at GAM stated that the dollar, undeniably is the central factor which has contributed to the weakness in emerging market currencies.
Trump last month declared that he would impose a 25 per cent tariff on all imports from Canada and Mexico along with which he will also add a 10 per cent tariff on goods coming from China. As a result of this announcement, the Mexican peso has dropped 2.1 per cent this quarter, while China’s offshore renminbi has lowered by 3.7%.
In a broader context, the South African rand is often viewed as a barometer for sentient across emerging markets because its liquidity has decreased by approximately 2.4 per cent since the end of September.
Even when accounting for interests accrued by holding assets in local currencies, only those from nations deemed high risk by investors such as Argentina and Turkey have managed to yield positive returns this quarter. As Macquarie’s Wizman noted, right now there is no emerging market is coming up with compelling economic narratives.
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