Most emerging market currencies expected to increase
Volatility expected in the near term
Only South Korea’s won and Thai baht expected to recoup losses from 2022
Emerging market assets
benefiting from exposure to commodities and weaker US dollar
Interest rates, led by the Fed, will largely determine performance of emerging markets
Chinese yuan, Indian rupee, Indonesian rupiah, Singapore dollar, and Vietnamese dong to gain 0.5-3% in a year
Philippine peso expected to weaken by 1%
Russia’s ruble to gain 3% to 77.0 per dollar in the next six months
South African rand to gain 2% to 17.5/$ in the next 12 months
Turkey’s lira to fall by another 15% to 22.5 per dollar in a year.
Most emerging market currencies are expected to increase over the coming year, as investors become less cautious and invest in riskier assets, according to a Reuters poll of 60 foreign exchange analysts. However, the poll also predicts volatility in the near term, with only South Korea’s won and the Thai baht expected to recoup their losses from 2022. The following are the key points from the poll:
Emerging market assets have benefited from their exposure to commodities and a weaker US dollar, as the Federal Reserve signals a pause in its tightening cycle.
Analysts expect emerging market currencies to outperform their G10 peers, due to attractive real yields and improved risk appetite.
The path of interest rates, led by the Federal Reserve in the near term, will largely determine the performance of emerging markets.
The Chinese yuan, Indian rupee, Indonesian rupiah, Singapore dollar, and Vietnamese dong are expected to gain between 0.5-3% in a year, while the Philippine peso is forecast to weaken by 1%.
Russia’s rouble is expected to gain 3% to 77.0 per dollar in the next six months, supported by higher oil prices.
The South African rand, down 5% so far this year, is expected to gain 2% to 17.5/$ in the next 12 months.
Turkey’s lira is set to fall by another 15% to 22.5 per dollar in a year, due to uncertainty surrounding Turkish presidential and parliamentary elections in May.
Historical View Point
The U.S. dollar has been the kingpin of global trade and capital flows for many moons, but lately, many countries have been exploring alternatives to the greenback to reduce their dependence on the United States.
After World War I, the U.S. emerged as the leading financial power and the dollar quickly displaced the pound sterling as the international reserve currency. The Bretton Woods Agreement in 1944 cemented the dollar’s dominance, creating a collective international currency exchange regime pegged to the U.S. dollar and gold.
However, since the 1970s, the purchasing power of the dollar has been dwindling, and countries have been searching for alternatives to the U.S. financial system. Initiatives and policies aimed at de-dollarization have emerged, including currency swap arrangements and diversifying reserve holdings into currencies like the euro and the Chinese yuan.
The inflationary pressures in the U.S. economy and the government’s fiscal policies, such as increased spending and rising debt levels, have contributed to the dollar’s decline. As a result, the Federal Reserve has had to adopt a more accommodative monetary policy, which has weakened the dollar further.
The U.S. dollar has been the dominant international reserve currency for some time, but its purchasing power has been steadily eroding since the 1970s. This has led to several initiatives aimed at reducing reliance on the U.S. financial system and exploring alternatives. The inflationary pressures and fiscal policies have only added to the dollar’s woes, necessitating more accommodative monetary policies from the Federal Reserve.
USD impact if Countries Pulled away:
The impact of countries moving away from the US dollar as their primary reserve currency would depend on a number of factors, including the size and influence of those countries, the speed and extent of the shift, and the reactions of other countries and global financial institutions.
In general, if several large and influential countries were to move away from the US dollar, it could lead to a decline in demand for the currency, which could in turn lead to a decrease in its value relative to other currencies. This could make imports more expensive for the US and increase inflation.
At the same time, countries moving away from the US dollar may seek to diversify their holdings into other currencies, such as the euro, yen, or yuan, which could lead to a shift in global economic power and potentially reduce the dominance of the US in the global economy.
It’s important to note that the US dollar is currently the world’s dominant reserve currency, and any significant shift away from it would likely take many years or even decades to unfold. It’s also possible that the US could take steps to mitigate the effects of such a shift, such as increasing the attractiveness of its currency through policy changes or negotiating new trade agreements with other countries.
