Emerging market currencies will take well into next year to start making noticeable gains against a retreating U.S. dollar, despite a growing view the interest rate cycle has peaked, a Reuters poll of FX strategists showed.
After getting battered for the most of 2023, the emerging market currencies have made nominal gains against the US dollar after the Fed had held the interest rates stable in the previous week, and the data suggested the US economy may be finally slowing.
The weakening trend was apparently to hold in the near term, as the majority of the analysts in the month of November. 3-7 polls of Reuters had expected the dollar to trade a little lower by the end of the year.
However, with most of the EM central banks that were expected to follow the Federal Reserve and the cut rates in the next year, the respective currencies were pretty unlikely to recoup the double digit loss that they have gathered over the last few years.
“We’ve seen already some pretty sharp gains last week, but the recent gains aren’t extending because there is still uncertainty about the Fed … and at the same time the U.S. is still performing better than most other economies,”
said the Head of FX & EM Macro Strategy Asia at Barclays Mitul Kotecha.
“So it’s difficult to see the EM currencies recoup some of the sharp losses that we’ve seen in the last few months. That said, we do expect some gains, it’s just going to be a bit more of a gradual path.”
“Easier Fed monetary policy should also take some pressure off select emerging market currencies in the second half of next year,”
as was noted by Nick Bennenbroek, an international economist at Wells Fargo.
Explore Comprehensive Financial Coverage!!