MoneyNews

Strengthening dollar put an end to investment in EM

UNITED STATES, WASHINGTON (OBSERVATORY) —

The prospect of an even softer US monetary policy is not too reassuring for investors in assets of developing countries that have to deal with a stronger dollar.

Instead of weakening, the world’s reserve currency has strengthened against all currencies in emerging markets, except for one, since the Federal Reserve’s interest rate cut in July.

In August, the trade-weighted dollar index touched a historic high, leaving behind a peak set in 2002, Bloomberg writes.

However, the classic dollar index for six major currencies has been trading at a maximum since 2017.

Meanwhile, the assumption that China could use the yuan as a tool in a trade dispute with the US is supporting defensive assets in a sign that the worst for emerging markets is probably not over.

Dollar growth undermines investor tactics in emerging markets. Borrowing currencies from low-interest countries to invest in high-yielding assets in emerging markets is futile if a stronger dollar reduces returns, and this becomes a deterrent to a large number of borrowers from developing countries, where companies and governments rely on foreign currency funding for growth.

True, it is worth noting that the single European currency fell to the dollar to a minimum since May 2017, and for those speculators who used the euro as a funding currency, the current situation, on the contrary, brings additional benefits.

“I am very worried about the dollar. At a time when investors need confidence, when they need a safe haven, they usually go to the dollar,” said Paul McNamara, investment manager of GAM UK in London in an interview with Bloomberg TV on Tuesday. “$ 9.4 billion in asset management.” This creates tough conditions for emerging markets.”

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