EM currencies face uphill battle as dollar's supremacy continues
safe-haven demand amid a slowing Chinese economy keeps the dollar ascendant, a Reuters poll of FX analysts found.
A stampede into the greenback pushed the wider index of emerging market currencies to its lowest in two weeks on Monday as U.S. Treasury yields and the dollar advanced on expectations interest rates will remain high.
The dollar index has surged more than 5.0% since its 15-month nadir in July.
That has put pressure on risky EM currencies, echoing the dynamics observed last year when the Fed began raising rates.
In the Sept. 1-6 poll, almost all beaten-down emerging market currencies were forecast to move little, or trade modestly higher against the dollar in a year, with some making small gains in three months.
Still, most won't recoup heavy losses made so far this year.
«If we still have a very strong dollar, I think EM currencies for the next month or two will probably remain on the back foot,» said Chris Turner, head of FX strategy at ING who added the main risk would be higher U.S.
rates for longer.
«The view was China was reopening, and there was going to be this big bounce in domestic demand that would drive global trade, but that just hasn't really happened. The underperformance of China has probably been the biggest story holding back EM currencies.» Earlier this year, many analysts expected China's reopening to boost the yuan and other EM currencies, especially those exporting commodities to the world's second-largest economy, but this scenario did not unfold as anticipated.
Instead, China's yuan has fallen about 6% to a near 16-year low this year as a likely end of the country's economic boom hurt the commodity exporter.
China's tightly controlled yuan was predicted to have only appreciated about 1%
