A remarkable surge in the US dollar, coupled with mounting economic challenges across developing nations, has precipitated the most significant decline in emerging market currencies witnessed since the Federal Reserve’s aggressive rate-hiking campaign of 2022.
JPMorgan’s emerging market currency index has plummeted by more than 5 per cent over the past two and a half months, positioning itself for the most substantial quarterly decline since September 2022. The downward spiral has been widespread, affecting at least 23 currencies monitored by Bloomberg this quarter.
The greenback’s strength has intensified since late September, emerging as a prominent ‘Trump trade’, bolstered by expectations surrounding President-elect Donald Trump’s anticipated implementation of sweeping trade tariffs and fiscal policy adjustments upon taking office.
Paul McNamara, lead manager on emerging market bond and currencies at GAM, emphasises the dollar’s central role, stating, “The dollar is absolutely front and centre” in driving emerging market currency weakness. The impact has been particularly evident in the Mexican peso, which has declined 2.1 per cent this quarter, while China’s offshore renminbi has experienced a 3.7 per cent drop.
The South African rand, traditionally viewed as a sentiment barometer for emerging markets due to its trading accessibility, has registered a 2.4 per cent decline since September’s end. Only high-risk nations like Turkey and Argentina have maintained positive returns when accounting for local currency interest earnings.
Market analysts point to a complex web of factors beyond dollar strength. China faces domestic economic challenges and potential further monetary easing, while Brazil grapples with deficit concerns and debt sustainability issues. The situation reflects a broader pattern of emerging market vulnerabilities, with many nations confronting unique domestic challenges alongside global market pressures.
This comprehensive sell-off marks the seventh consecutive annual decline in JPMorgan’s emerging market currency gauge, highlighting persistent challenges in developing economies and reinforcing the US dollar’s dominance in global financial markets.
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