Forex

Column-EM has no easy escape from dollar squeeze: McGeever

Published

5 days ago

December 15, 2024

By Jamie McGeever

ORLANDO, Florida (Reuters) – A strong U.S. dollar and high Treasury yields are posing significant challenges for emerging economies, and policymakers have no easy way to counter this powerful one-two punch.

With American exceptionalism casting a shadow over the rest of the world, many emerging markets (EM) are facing weaker currencies, increased costs to service dollar-denominated debt, depressed capital flows or even capital flight, dampened local asset prices and slowing growth.

Added to that is the uncertainty and nervousness surrounding the incoming U.S. government’s proposed tariff and trade policies.

History has shown that when trends like these take hold in emerging markets, they can create vicious cycles that accelerate rapidly and prove difficult to break.

Unfortunately, there appears to be no simple road map for avoiding this.

Just look at China and Brazil.

The monetary and fiscal paths being pursued by these two EM heavyweights could not be more different. Beijing is pledging to ease monetary and fiscal policy to reflate its economy; Brasilia is promising substantially higher interest rates and seeking to get its fiscal house in order.

Their divergent paths – and ongoing struggles – suggest that no matter where EM economies are in terms of growth, inflation and fiscal health, they are likely to face a difficult road ahead in the coming years.

GO WITH THE FLOW

Brazil and China are clearly in very different places, not least with regard to inflation. Brazil has lots of it, prompting the aggressive actions and guidance from the central bank. China, on the other hand, is battling deflation, and is starting to finally slash interest rates.

Another difference is the fiscal headroom each has to generate growth. Brazil’s reluctance to cut spending sufficiently is a key cause of the real’s slump and the central bank’s eye-popping tightening. The market is forcing Brasilia’s hand.

The market is also putting pressure on Beijing, but pushing it in the opposite direction. The collective size of the support packages and measures announced since September to revive economic activity run into the trillions of dollars.

But even though the two countries’ tactics are diametrically opposed, the outcomes have thus far been similar: sluggish growth and weak currencies, a picture most emerging countries will recognize. Brazil’s real has never been weaker and the tightly managed yuan is close to the troughs last visited 17 years ago.

As Reuters exclusively reported, China is mulling whether to let the yuan weaken in response to looming U.S. tariffs, and analysts at Capital Economics warn that it could tumble as low as 8.00 per dollar.

But allowing the yuan to depreciate is not without risk. Doing so could accelerate capital outflows, and spark ‘beggar thy neighbor’ FX devaluations across Asia and beyond.

A race to the bottom for EM currencies would be very problematic for the countries involved, as the dollar is now a bigger driver of EM flows than interest rate differentials, according to the Bank for International Settlements. Analysts at State Street (NYSE:) reckon exchange rates explain around 80% of local EM sovereign debt returns.

The Institute of International Finance estimates that capital flows to emerging countries next year will decline to $716 billion from $944 billion this year, a fall of 24%.

“Our forecast is premised on a base-case scenario, but significant downside risks remain,” the IIF said.

FINANCIAL CONDITIONS TIGHTEN

EM countries also face headwinds from higher U.S. bond yields.

While the pile of hard currency sovereign and corporate debt is small compared to local currency debt, it is rising. Total (EPA:) emerging market debt is now approaching $30 trillion, or around 28% of the global bond market. That figure was 2% in 2000.

And the squeeze from higher borrowing costs is being felt in real time. Emerging market financial conditions are the tightest in nearly five months, according to Goldman Sachs, with the spike in recent months due almost entirely to the rise in rates.

Real interest rates are a lot higher now than they were during Trump’s first presidency. But many countries may still struggle to cut them, as doing so “could create financial stability concerns by putting pressure on exchange rates,” JP Morgan analysts warn.

On the positive side, emerging countries do have substantial FX reserves to fall back on, especially China. Most of the world’s $12.3 trillion FX reserves are held by emerging countries, with $3.3 trillion in China’s hands alone.

Finding themselves caught between a rock and a hard currency, EM policymakers may soon be forced to dip into this stash.

(The opinions expressed here are those of the author, a columnist for Reuters.)

Forex

Asia FX fragile with dollar upbeat ahead of PCE data; yen hits 5-mth low

Published

11 hours ago

December 20, 2024

Investing.com– Most Asian currencies weakened on Friday with the Japanese yen recovering marginally from a five-month low as strong inflation data only partially offset a dovish outlook for the Bank of Japan.

Regional currencies were pressured by a broad push into the dollar, which hit an over one-year high after the Federal Reserve flagged a slower pace of rate cuts in 2025. The greenback remained well-bid even as markets positioned for a potential U.S. government shutdown.

The and rose marginally in Asian trade, and were at their strongest levels since November 2023. Focus is now on key data due later on Friday for more cues on interest rates.

The Chinese yuan weakened to a more-than one-year low after Beijing left a key lending rate unchanged.

Yen rises from 5-mth low on strong CPI; BOJ outlook dovish

The Japanese yen was among the better performers on Friday, with the pair falling 0.2% as inflation data for November read slightly stronger than expected.

But the yen was nursing a tumble to its weakest level in five months on Thursday, with USDJPY having surged to 157.93 yen- its highest level since late-July.

While strong CPI data did further the case for an eventual rate hike by the Bank of Japan, comments from Governor Kazuo Ueda on Thursday suggested that a hike will come later rather than sooner in 2025.

The central bank and signaled that inflation will continue to rise. But Ueda’s comments on watching springtime labor wage negotiations suggested that a hike may not come until at least March.

Recent weakness in the yen also spurred renewed speculation over government intervention, after ministers made a verbal warning on yen weakness.

Chinese yuan at 1-yr low; PBOC leaves loan prime rate unchanged

The Chinese yuan’s pair rose 0.2%, hitting its highest level since November 2023.

The People’s Bank of China left its benchmark unchanged on Friday, as widely expected, with the central bank seen having limited headroom to cut rates further amid sustained yuan weakness.

Looser monetary policy has also provided limited support to the Chinese economy over the past year, with Beijing expected to ramp up fiscal spending in the coming year to boost growth.

Broader Asian currencies mostly weakened on Friday, and were nursing steep declines this week as traders remained biased towards the dollar. The Australian dollar’s pair fell 0.2% and remained at a two-year low, while the South Korean won’s pair rose 0.4% and was close to its highest point in nearly 15 years.

The Singapore dollar’s pair was flat, while the Indian rupee’s pair steadied after hitting a record high above 85 rupees earlier this week.

Forex

Dollar strengthens as market digests Fed’s hawkish cut

Published

11 hours ago

December 20, 2024

By Chibuike Oguh, Harry Robertson and Rae Wee

NEW YORK/LONDON/SINGAPORE (Reuters) -The dollar hovered near its two-year high on Thursday after the Federal Reserve cut interest rates and signaled a much slower monetary policy easing trajectory in 2025, while the yen weakened against the greenback after the Bank of Japan held rates steady.

The dollar edged higher from losses early in the session after a stronger-than-expected reading on U.S. third quarter GDP showed the economy grew at a 3.3% annual rate.

The number validated the Federal Reserve’s cautious new take-it-slow approach to easing, as did a bigger-than-expected fall in the number of applications for unemployment insurance to 220,000 last week.

Currencies around the world tumbled on Wednesday after the Fed decision sent yields higher and boosted the dollar, although many rebounded on Thursday in choppy trading conditions with thin volumes ahead of the holiday period.

The , which measures the greenback against six rival currencies, reached as high as 108.480 on the session, topping the 108.180 it reached in the prior session, which is its highest level since November 2022. It was last up 0.08% to 108.360.

The week has been chock-a-block with the last central bank policy meetings of 2024. The BOJ kept interest rates steady as expected, but the yen fell sharply as Governor Kazuo Ueda gave little away in a post-meeting press conference.

The dollar rose 1.63% against the yen to 157.55, trading at its highest levels since July.

“The main focus has been on the central bank decisions, which were very dollar supportive overall. The Fed had a hawkish cut and the Bank of Japan delivered a dovish hold, and those were probably the main two drivers,” said Vassili Serebriakov, FX strategist at UBS in New York.

Investors had been looking out for hints of imminent BOJ tightening, particularly after the Fed struck a hawkish tone at its meeting a day earlier.

But the governor reiterated that policymakers would need more time to assess incoming economic data and the implications of U.S. President-elect Donald Trump’s policies.

The fallout from the Fed continued to ripple across financial markets after traders heavily dialed back on easing expectations next year.

The euro, which tumbled 1.34% on Wednesday, managed to claw back some losses and was last 0.16% higher at $1.036650.

“Since the election interest rate expectations in the U.S. have gone up, but outside the U.S. they’ve gone down whether you look at ECB or you know most other central banks,” said Ronald Temple, chief market strategist at Lazard (NYSE:) in New York.

“And that leads to dollar strengthening as those interest rate differentials widen in favor of the U.S. So I think you should expect more dollar strengthening because I don’t believe the interest rate markets or the currency markets have fully priced in the implications of tariffs.”

The Bank of England held interest rates at 4.75% as expected on Thursday. Sterling dipped, weakening 0.58% to $1.25.

The Canadian dollar sank to its lowest in more than four years at 1.44 per U.S. dollar. The South Korean won tumbled to its weakest level in 15 years.

Fed Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation, sending global stocks plunging and bond yields spiking. The yield on benchmark U.S. 10-year notes rose 7.2 basis points to 4.57%.

The Swedish and Norwegian crowns both rebounded against the dollar on Thursday, after Sweden’s Riksbank cut rates but Norway’s Norges Bank held them steady.

The Swedish crown strengthened 1% versus the dollar to 11.026, while the Norwegian krone pared earlier gains and was down 0.58% to 11.45.

The dropped to a two-year low before also ticking up. Data on Thursday showed that New Zealand’s economy sank into a recession in the third quarter. The currency was last up 0.16% versus the greenback to $0.5632.

Australia’s dollar bottomed at $0.6199, a two-year low, but was last up around 0.37%.

Currency bid prices at 19 December 09:21 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 108.4 108.26 0.13% 6.93% 108.48 107.81

Euro/Dollar 1.0362 1.0351 0.1% -6.12% $1.0422 $1.0348

Dollar/Yen 157.34 154.75 1.67% 11.55% 157.77 154.5

Euro/Yen 163.04 160.26 1.73% 4.76% 163.8 159.87

Dollar/Swiss 0.8984 0.901 -0.32% 6.72% 0.9022 0.895

Sterling/Dollar 1.2496 1.2574 -0.6% -1.79% $1.2665 $1.2497

Dollar/Canadian 1.4389 1.4449 -0.4% 8.55% 1.4466 1.4346

Aussie/Dollar 0.6238 0.6218 0.33% -8.49% $0.6265 $0.6199

Euro/Swiss 0.9308 0.9328 -0.21% 0.24% 0.9355 0.9307

Euro/Sterling 0.8289 0.823 0.72% -4.36% 0.8293 0.8223

NZ Dollar/Dollar 0.563 0.5624 0.18% -10.84% $0.5662 0.5608

Dollar/Norway 11.448 11.3836 0.56% 12.95% 11.4594 11.2839

Euro/Norway 11.8616 11.7879 0.63% 5.68% 11.877 11.754

Dollar/Sweden 11.0294 11.1267 -0.87% 9.56% 11.1366 10.9966

Euro/Sweden 11.4289 11.5226 -0.81% 2.73% 11.5355 11.4276

Forex

Dollar set for weekly gains ahead of key inflation release

Published

11 hours ago

December 20, 2024

Investing.com – The US dollar slipped slightly Friday, pausing for breath after strong gains this week as traders await the release of the Fed’s preferred inflation gauge.

At 04:40 ET (09:40 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 107.960, after earlier this week climbing to a two-year high.

Dollar on course for weekly gains

The has slipped slightly Friday, but is still on course of weekly gains of around 1%, bolstered by a relatively hawkish US rate outlook after the last Federal Reserve policy meeting of the year earlier this week.

The US central bank policymakers now only sees an additional 50 basis points of easing in 2025, a likely two cuts of 25 basis points, instead of the four reductions indicated in the previous forecasts in September.

The November is expected to rise 2.9% on an annual basis, up from 2.8% the prior month, while the monthly figure is seen climbing 0.2%, a slip from 0.3% in October.

A stronger-than-expected rise in the core PCE index could have an outsized impact on markets, as the hawkish nature of the Fed’s comments has shifted the likelihood towards fewer or potentially no further reductions next year.

“Market pricing moved hawkishly and towards our view of just one further 25 bps cut outlined in our team’s 2025 outlook,” analysts from Macquarie said in a note.

Sterling near one-month low after weak retail sales

In Europe, traded largely flat at 1.2500, after falling on Thursday to a one-month low after Bank of England policymakers voted 6-3 to keep interest rates on hold on Thursday, a bigger split than expected, amid worries over a slowing economy.

Data released earlier Friday showed that British rose by a weaker-than-expected 0.2% in November, below the expected jump of 0.5%.

rose 0.2% higher to 1.0385, just off a one-month low, and still on track for a weekly drop of over 1% on the back of the dollar’s strength.

rose unexpectedly in November, increasing by 0.1% on the year, instead of the 0.3% decline predicted, while the business climate index in Germany’s retail sector fell slightly, the Ifo Institute said on Friday.

This year was very challenging for the retail sector and the overall economic environment is likely to remain difficult in 2025, “even though many retailers are hoping for an improvement in consumer sentiment,” said Ifo expert Patrick Hoeppner.

The lowered its key rate last week for the fourth time this year, and is likely to cut interest rates further in 2025 if inflation worries fade.

Yen helped by CPI data

In Asia, fell 0.4% to 156.74, as for November read slightly stronger than expected, strengthening the case for an eventual rate hike by the .

But the yen was nursing a tumble to its weakest level in five months on Thursday, after comments from Governor Kazuo Ueda suggested that a hike will come later rather than sooner in 2025.

edged 0.1% higher to 7.3050, hitting its highest level since November 2023.

The People’s Bank of China left its benchmark unchanged on Friday, as widely expected, with the central bank seen having limited headroom to cut rates further amid sustained yuan weakness.