AEMB - A Stronger U.S. Dollar - Will EMS Feel The Pinch?
2024-07-03 07:15:00 ET
Summary
- The US dollar has strengthened notably in 2024 with the shift in market expectations to higher US rates for longer.
- EMs’ buildup of official reserves and the evolution of EM debt to far higher issuance in local currencies are structural factors that improve the resilience of EMs to external vulnerabilities.
- Capital flows to EMs have held up during the recent bout of US 10-year treasury yield rise and USD strengthening and is a sign of investor conviction in the EM asset class.
So far in 2024, sticky US inflation has led markets to expect higher rates for longer in the US. Just at the end of last year, policy rate cuts in the US felt more imminent. As the US Fed has held the Fed Funds rate at its highest in over 15 years, the US 10-year treasury yield rose 62 basis points in 2024 through the end of May, and the US dollar index rose 3.3% alongside (see Exhibit 1). Moreover, markets have recalibrated their rate cut expectations to less than two cuts in 2024 and starting much later in the year. A strong US dollar has wide implications for the global economy and financial assets. Here we explore its consequences for emerging markets (EMs) specifically.
Exhibit 1: US dollar index vs key US interest rates
US Dollar vs US interest rates
Source: FTSE Russell/LSEG. Data as of May 31, 2024. The USD index is the DXY US dollar index. The US 10yr yield is the bid yield on the 10-year US treasury benchmark security
