Fed Rate Hikes Risk Crushing Lira, Peso and Rand
Zhou Ailin
/SOURCE : Yicai
Fed Rate Hikes Risk Crushing Lira, Peso and Rand

(Yicai Global) Sept. 5 -- Emerging market currencies are likely to face more pressure as the US dollar becomes stronger on the back of interest rate hikes.

"The more Trump interferes with Fed policy decisions and seeks to weaken the dollar, the more likely the Fed will hike interest rates in a more aggressive way to prove its independence. It is in a position to do so, given the country's inflation and employment numbers," Yan Chaoming, chief economist of Nomura Research Institute, told Yicai Global. "That will pose more potential risks to the emerging markets."

The US dollar index, which compares the currency to a basket of others, has reached its highest point this year on Aug. 14 at USD96.73. The benchmark stayed flat at 95.4420 at 5.39 p.m.

The general market consensus is that there will be two more rate hikes this year and the federal funds rate will reach a neutral level of around 3 percent in the next two years.

"The Fed has a reason to raise rates in a more hawkish manner since US inflation has hit 2 percent," said Richard Koo, chief economist at the same research institute, adding that the reason why the US central bank has not done so yet is because it doesn't want to impact the market much. 

 "The Fed is by no means dovish," Koo added. "Measures such as tax cuts and higher infrastructure spending have helped prolong the US economic expansion, which has no reason or sign of weakening in the medium term."

"If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate," Reuters reported the Federal Reserve Chairman Jerome Powell, as saying at the annual global central bank conference in Jackson Hole, Wyoming last month.

The hawkish interest rate strategy may backfire on the US as the emerging economies may be adversely affected by increases in their often US dollar-denominated debt, which could send the whole world economy into disorder. "The South African rand is the most worrisome following the significant depreciation in the Turkish lira and the Argentine peso," Kelvin Wong, chief technical strategist for Asia at Gain Capital Group, said to Yicai Global.

"With a rising dollar and falling emerging market currencies, there is little hope for the South African rand to remain strong, given the country's high current account deficit, vast US dollar-denominated external debt and heavy reliance on exports," he added.

"The Indonesian rupiah has hit its weakest level since the Asian financial crisis in 1998. The Indian and Sri Lankan rupees have also fallen to record lows. Many other emerging market currencies are continuing to slide, forcing central banks to take action," Hussein Sayed, chief market strategist at broker ForexTime told Yicai Global.

The Chinese yuan is set to rally as the central bank has reintroduced the counter-cyclical factor last month, as well as banned banks in the Shanghai Free Trade Zone from depositing or lending yuan positions to overseas interbank accounts, market analysts said. The yuan is likely to move in both directions while keeping a generally stable level, they added.

Editor: Emmi Laine

Follow Yicai Global on
Keywords: Currency Market , Emerging Market Currencies , Devaluation Pressure , Inflation Worry , Fed , Monetary Policy , Economic Expansion