The strengthening of the US dollar has emerged as a significant concern for countries worldwide, triggering alarm bells not only in emerging economies (EMs) but also in advanced industrialized countries.
The currencies of the G20 group of major economies are almost all depreciating against the dollar. The Turkish lira has been leading the decline since the beginning of the year at 8.8%; the yen has fallen 8% and the South Korean won 5.5%.
Both developed and emerging economies have seen currencies weaken at an accelerating pace, with the Australian dollar, Canadian dollar, and euro falling 4.4%, 3.3%, and 2.8%, respectively.
Why is the US dollar appreciating?
The primary impetus behind the dollar’s rally is the receding prospect that the US Federal Reserve will soon cut interest rates. The US consumer price index (CPI) released Wednesday (April 10) rose by more than market expectations, meaning higher US inflation might be returning.
Consequently, traders have scaled back their bets on potential Fed interest-rate cuts, thereby propelling the dollar’s ascent. Reflecting this trend, the Bloomberg Dollar Spot Index, tracking the greenback against a basket of major currencies, has surged by over 4% this year alone.
In addition, growing tensions in the Middle East following Iran’s attacks on Israel have boosted the US currency more recently thanks to its safe-haven status.
Finally, while many economies worldwide are experiencing moderate growth, US economic indicators, ranging from employment figures to retail sales, are consistently outpacing expectations.
While several emerging economies still offer higher yields on their bonds than US debt, the gap has been shrinking. At the start of last year, Brazil’s policy rate was 13.75%, Chile’s was 11.25% and Hungary’s was 13%. Since then, central banks in the three economies have trimmed their key rates, narrowing the yield advantage for potential investors.
Source: Trade Finance
