Most emerging market currencies will continue to struggle against the mighty dollar over the coming year as the U.S. Federal Reserve finally delivers expected aggressive policy tightening, according to a Reuters poll of FX strategists.
Central banks in emerging market economies have been bracing for this for months by hiking their benchmark interest rates. But the actual moment when the Fed delivers half-point rate increases and rapid balance sheet reduction still matters.
Even currencies which have been dragged higher by the ongoing commodity cycle and their respective central banks' policy tightening, like the Brazilian real and the South African rand , were forecast to give up about half of those gains in a year.The Mexican peso - a classic emerging market foreign exchange hedge — is expected to lose more than three times its gains for this year in 12 months.
"A particular risk to EMFX is that as the Fed starts to deliver rate hikes, further upside in U.S. yields could be primarily driven more by real yields than breakeven inflation"While most emerging market currencies have managed to escape the onslaught of the Fed's policy tightening relatively unscathed, the Russian rouble and the Turkish lira were notable exceptions.
The Russian currency is driven by export-focused companies selling foreign currency and low activity of importers. But analysts warned the recent rouble rally won't last.
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