Emerging Market Currencies Face Uphill Battle to Recover Against Dollar
Diminished Rate Cut Expectations Weigh on Emerging Market Currencies
Most emerging market currencies are expected to struggle to recover this year’s losses against the dollar in the coming months. The optimism for aggressive rate cuts from the U.S. Federal Reserve has diminished, according to a Reuters poll of FX strategists.
Emerging Market Currency Basket Loses Momentum
After a positive end to 2023, the rally in the emerging market currency basket has lost steam, down 1.2% for the year, influenced by higher U.S. Treasury yields.
U.S. Economic Data and Fed Comments Impact Currency Predictions
Better than expected U.S. economic data and hawkish comments from Fed policymakers have led to a rollback on rate cut predictions, resulting in a 3% increase in the dollar in just a few weeks.
Little Hope for Emerging Market Currency Gains
In the Feb. 2-6 Reuters poll of 50 FX strategists, it was predicted that almost all emerging market currencies would barely recoup year-to-date losses six months from now. Analysts believe that emerging market currencies are fairly priced and are not likely to appreciate significantly due to the consequences of U.S. exceptionalism.
Global Interest Rate Cycle and China’s Growth as Key Influencers
Emerging market currencies are largely dependent on the global interest rate cycle led by the Fed, while growth headwinds in China continue to be a key obstacle to their performance.
Predictions for Specific Currencies
- The Indian rupee was predicted to gain only around 0.6% by end-July.
- The Thai baht and South Korean won, which lost 3.4% and 2.5% respectively this year, were predicted to gain around 3.5% in the next six months.
- The Brazilian real was forecasted to just recoup its 1.3% losses so far this year in the next six months.
Impact on Specific Currencies
The rand was seen as offering one of the most attractive combinations of value and real carry but remains one of the most dollar-sensitive EM currencies.
Outlook for Russian Ruble and Turkish Lira
The Russian rouble is expected to lose nearly 2% to 92.28/$, while the Turkish lira will weaken over 9% to 33.67/$ in the next six months.
As the outlook for aggressive rate cuts from the U.S. Federal Reserve diminishes, emerging market currencies face an uphill battle to recover against the dollar in the coming months.