King Dollar is creating a new headache for virus-battered economies globally, with emerging markets especially vulnerable as they try to cope with collapsing currencies and plunging demand. Investors are fleeing emerging markets in record numbers and piling into the safe-haven greenback, with two emergency interest-rate cuts this month by the Federal Reserve doing nothing to diminish the dollar’s appeal.
With the dollar more integrated into the world economy than ever before, its gains are an added stress for businesses and governments as they brace for soaring costs on their dollar debt. The dilemma for emerging market central banks is that as they slash interest rates to support growth, they risk destabilizing their currencies as well if they cut too much.
Turkey’s central bank was the latest emerging market to make an emergency rate cut. South Korea, Chile, Vietnam, Sri Lanka and Pakistan already eased this week following the Fed’s action Sunday, and South Africa, Indonesia and Brazil are expected to reduce their key rates in coming days.
New research from the Bank for International Settlements shows that since the global financial crisis, unexpected dollar appreciation depresses world trade growth. A reason for this could be a tightening in financial conditions as dollar lending to emerging markets slows, according to the research paper.
Outflows from emerging markets are already at record levels, reaching $30 billion in 45 days amid the virus outbreak, according to the Institute of International Finance. All major emerging-market currencies tracked by Bloomberg have weakened against the dollar since Jan. 20 — the onset of Covid-19 concerns in Asia — with the Russian ruble and Mexican peso dropping almost 20%.
The pain is also felt in emerging Asia, where the market plunges have brought back memories of the Asian financial crisis more than two decades back. Indonesia’s rupiah is the worst performer in Asia this year, down 8.9%, South Korea’s won is trading near its weakest since 2010, and India’s rupee slumped to a record low last week.
Both Indonesia and the Philippines are set to cut interest rates Thursday, with the latter expected to ease by a bigger-than-usual 50 basis points.
Surging U.S. Dollar Is Next Big Headache for World Economy, Bloomberg, Mar 18
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