The emerging markets (EM) will soon be adversely affected by the continuous strengthening of the US dollar that is being pushed by recovery in the US economy, according to Dong Tao, chief economist, non-Japan Asia economics research at Credit Suisse.
“I have a fundamental call that the US dollar is going to strengthen for various reasons. The US economy is recovering much better than the other major economies. The manufacturing sector is returning to the US and the US current account deficit is shrinking dramatically. All of these are pointing to a sustained dollar rally and we are just at the beginning of it. If the dollar strengthens continuously, the emerging markets will have problems. That’s my call,” Tao informs in a news briefing.
The US dollar has been strengthening continuously for the past two months against a broad basket of currencies, its longest rally in more than 17 years, according to the ICE US Dollar Index.
“Every time you see a stretch of dollar strengthening, we see emerging markets getting into trouble. The last time we saw a sustained dollar rally was between 1993 and 2001. In 1995, there was the Mexico crisis, 1997 Asian crisis, 1998 Russia crisis, 1999 Brazil crisis, and the 2001 Argentina crisis,” Tao recalls.
He explains that in previous years, whenever the US Federal Reserve Board decides to tighten the money supply and interest rates start moving up, the money that had flooded into the emerging markets had turned around and moved towards the US dollar zone.
“When this happens, the emerging markets exchange rates start to depreciate, inflation comes back, central bank raises interest rates. We actually had a pre-run of that in August last year and the emerging markets were hit by panic. After that, it was not that the emerging markets did any better but (former US Federal Reserve Board chairman Ben) Bernanke said we’re not going to exit any time soon. And now,(current US Fed head Janet) Yellen is telling us something different. When the market has strong expectation that rates are going up continuously, that’s the time the emerging markets will have some severe troubles,” Tao says.
