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Emerging Market Coins Remain Strong Despite Dollar Rising

A strong US dollar isn’t driving emerging market currencies into a tailspin. This is unusual.

Emerging-market currencies’ yields have been higher than advanced economies’ returns since January, according to data compiled by

barclays.

The WSJ Dollar Index, which measures the US dollar against a basket of currencies, is up nearly 6% to date and has reached levels not seen in decades as concerns over inflation and slower growth swept the world.

But currencies including the Brazilian real, Chilean peso and South African rand posted gains even as the dollar strengthened. This is because investors are taking away currencies that profit from higher commodity prices and trade fluctuations.

Real, which has appreciated 13% against the dollar to date, has become a favorite of asset managers due to its status as Brazil’s leading soybean and coffee exporter.

The Chilean peso has benefited from Chile being one of the world’s largest copper producers.

Financial markets fluctuated in May. The dollar has pulled back from its highs in recent weeks and the benchmark is the yield on the US 10-year Treasury note. fell below 3%. Still, analysts and traders say the size and speed of recent moves remains important.

Facade of a currency exchange office in Brazil. The Brazilian real has risen 13% against the US dollar so far.


Photograph:

rahel patrasso/Reuters

the rise of the dollar Created volatility in foreign exchange markets and attracted more investors to the asset class. Money managers usually sell emerging market currencies when the dollar rises, but The sharpest commodity rally in modern business history and various central bank policies around the world have turned traditional dynamics upside down.

Analyst Nafez Zouk said: “In a world of war, supply chain destruction, a stronger dollar and a weaker euro, how can emerging market currencies rally during the first quarter? based in London

Aviva Investors.

The dollar functions as the world’s reserve currency and is used for commodity trading in the global economy. A stronger dollar often hurts emerging market economies by weakening their currencies and increasing inflation. It also makes it more expensive to import foreign goods.

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Emerging market currencies tend to lose value when the dollar suddenly rises. This is because investors flock to the US dollar when they are worried about global growth prospects or seek shelter during times of market turmoil.

Investors are now focusing on trade balances and local factors to gauge whether to buy or sell foreign currency rather than the direction of the US dollar.

“Often the dollar drives what happens,” said James Lord, head of emerging market currency strategy at Morgan Stanley. But commodity prices rose in the context of slower growth, creating different relationships between commodities, the dollar and emerging market currencies.”

Some of the losers in emerging market currencies face China or rising energy costs. Hedge funds sell currencies such as Thai baht and South Korean won. Thailand and South Korea rely heavily on others for fuel.

Asset managers have sold the offshore Chinese renminbi, also known as the offshore Chinese yuan, as a direct bet that the Chinese economy will slow in the wake of the Covid-19 lockdowns and so-called globalisation. The offshore Chinese renminbi has dropped as much as 7.3% against the dollar since the start of the year. Some analysts say that Covid-19 has exposed the vulnerabilities of supply chains and that US businesses reassessing global trade.

Investors are buying emerging market currencies linked to countries where central banks are raising interest rates to rein in price increases. The Central Bank of Brazil raised the benchmark loan rate this month. five-year highThe Polish National Bank raised the key interest rate three-quarters of a percentage point to 5.25%. This attracted investors to the Polish zloty and Brazilian real.

“Emerging market central banks are being forced to tighten their policies to keep up with the Fed,” said Stephen Gallo, Head of European Currency Strategy at BMO Capital Markets. “Either that or capital controls are in place.”

Write to Julia-Ambra Verlaine at julia.verlaine@wsj.com

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