Soaring US dollar Threatens Trouble for Emerging Markets

Strong economy and hawkish monetary policy push back greenback ever higher – and other currencies are suffering. The US dollar continued to soar in value over Wednesday night, signalling the likelihood of more interest rate rises and spelling trouble for developing countries that have borrowed heavily in the greenback.With impressive service sector data published on Wednesday and strong jobs figures in the non-farm payrolls expected on Friday, the dollar hit an 11-month high against the yen and drove US treasury yields to their highest since mid-2011. The pound slipped below $1.30.

Rising US bond yields indicate that the Federal Reserve, under its hawkish chairman Jerome Powell, is likely to keep raising interest rates from their current 2.25% well into 2019. They are also unfavourable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies.

The Australian dollar, which is seen as a proxy for emerging Asian markets, slipped below US$0.71 and seems set to dip further. The Indian rupee fell to an all-time low against the dollar on Thursday morning of 73.77 while the Indonesian rupiah has plunged to a 20-year low.

China’s currency, which has suffered as the trade war with the US has intensified, was not immune. The offshore yuan rate reached above 6.9 to the dollar.

“This is a perfect storm for the rising dollar,” said Chris Weston of the online trading firm Pepperstone in Melbourne. “Strong economic performance and the Fed seen [as] happy to take rates higher.

“Lots of countries have issued dollar-denominated debt and as the dollar goes higher, debt levels are exaggerated.”

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Bond yields also rose across Asia in a tightening of market conditions which is dangerously out of step with what is happening in the local economies.

“A simple dynamic is playing out in the global economy right now – the US is booming, while most of the rest of the world slows or even stagnates,” said HSBC economist Kevin Logan.