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How the US dollar could turn the fate of emerging markets

3 0 5
12.07.2018

The last quarter was one that emerging market investors would rather forget. According to Bloomberg, the currency, equity and bond markets of developing economies suffered their worst three-month period since the third quarter of 2015 when emerging market assets bore the brunt of the sell-off stemming from the surprise yuan devaluation.

A toxic combination of an abrupt tightening in financial conditions, an end to the period of synchronised global growth and a dramatic escalation in tensions over international trade has led to a sharp deterioration in market sentiment. According to data from JPMorgan, emerging market bond and equity funds have suffered outflows for the past 11 weeks, while the JPMorgan Emerging Market Currency Index, a leading gauge of currencies in developing nations, plunged 9 per cent last quarter, its sharpest fall since 2011.

Yet, over the past month or so, the most important financial vulnerability in emerging markets has become less acute. The rally in the US dollar has lost momentum and has even begun to unwind slightly. While the dollar index, a measure of the performance of the greenback against a basket of other currencies, surged 6 per cent between mid-April and the end of May, it has since proved volatile, and has fallen a tad since the end of last month.

To be sure, it is too early to call time on the dollar’s ascent, not least given the increasingly hawkish signals from the Federal Reserve. However,........

© South China Morning Post