A strengthening dollar pushed Argentina to scale-up its policy interest rate percentage points on Friday to 30.25 percent, highlighting the intensifying pressure on emerging market currencies.
The rate rise ended a week in which Argentina’s central bank spent about $3bn to bolster the currency, which has surrendered more than a quarter of its dollar value over the past year. The peso has declined particularly sharply among emerging market currencies as investors worry about high inflation of 25 percent a year and deep deficits in the country’s budget and current account.
But other EM currencies have also suffered this month as the US dollar has strengthened after losing value for more than a year, and as the yield on 10-year US Treasury bonds has risen towards 3 percent – a psychological line in the sand that was crossed this week for the first time since 2014.
This week, the Bloomberg index of eight high-yielding EM currencies favored by carry traders – who borrow in the dollar or other low-interest rate currencies to invest where interest rates are higher – turned negative for the year with a decline of 3 percent this month. The index, which includes Brazil, India, Mexico, Indonesia, South Africa, Hungary, Turkey and Poland - has now fallen nearly 5 percent from its January peak as US bond yields have climbed.
Investors have been pulling back from emerging market assets overall this month after accumulating about $45bn to EM stocks and bonds in the first quarter of the year. The Institute of International Finance, an industry association, said rising US interest rates had hit emerging markets “in ways reminiscent of the taper tantrum in May 2013”, when investors dumped EM assets after the Fed signaled an end to its ultra-loose monetary policies.
Written by Scherzando Karasu, External Financial Journalist.
All financial products traded on margin carry a high degree of risk to your capital.
The thoughts and opinions expressed here are solely those of the writer, and do not necessarily reflect the view of ActivTrades PLC.
This commentary is for information purposes only and should not be considered as investment advice. The decision to act on any ideas and suggestions presented is at the sole discretion of the reader.