USD to bounce back against emerging market currencies? – NBF

Krishen Rangasamy, analyst at National Bank Financial, points out that since hitting a peak last September, the Federal Reserve’s Nominal Emerging Market Economies Dollar Index has dropped roughly 2.5%.

Key Quotes

“This depreciation of the U.S. dollar relative to currencies of emerging markets is arguably a positive development with regards to financial stability in the region.”

“A depreciating greenback should make debt servicing less painful for those folks. A weaker dollar can also make it easier for businesses in emerging markets to tap loans from domestic banks which rely on wholesale funding to get access to dollars. That can ripple through emerging economies by boosting business investment and even exports, especially for firms in the supply chain that rely on credit to operate.”

“If the recent surge in the MSCI emerging markets index is any guide, investors already seem to understand this connection between dollar weakness and growth prospects. But can the dollar’s downtrend versus emerging market currencies continue? That could be difficult especially with the Federal Reserve close to ending its easing cycle.”

“For the first time in years inflation is now higher in the U.S. than in emerging markets.”