BLBG: Dollar Bulls Gore Emerging Markets as Euro Stops Fearing the Fed
Dollar bulls betting the Federal Reserve will raise interest rates in 2015 are shifting their attention to selling emerging-market currencies, as the euro and yen rally from losses earlier in the year.
A gauge of emerging-market currencies slumped to a record Friday as Chinese manufacturing slowed and a plunge in stocks around the world sapped demand for higher-yielding assets. The currencies of developing nations -- from Russia to Mexico to Malaysia -- were the worst performers against the greenback this week, while the Swiss franc, euro and yen were among the biggest gainers.
“The real dollar-strength story is actually going to be expressed through emerging markets,” said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “Historically, the dollar, against the majors, tends to strengthen ahead of the start of a tightening cycle because markets anticipate that. When the Fed finally embarks on a hiking cycle, the dollar trend starts to wobble a little bit.”
Malaysia’s ringgit slid 1 percent to 4.1685 per dollar as of 6:40 a.m. New York time, after touching 4.1895, the weakest level since the Asian crisis of the late 1990s. South Korea’s won tumbled 0.8 percent to 1,194.82 to the greenback, approaching an almost four-year low.
Euro Carry
The euro climbed to a two-month high of $1.1295, before paring its gain, leaving it up 1.5 percent in the week.
The yen advanced 0.5 percent to 122.83 per dollar, after reaching the strongest level since mid-July, and jumped 1.2 percent in the week.
“Because of how low interest rates are now in Europe, the euro has become a funding currency for carry trades,” Azad Zangana, a senior European economist at Schroders Plc, said in an interview on Bloomberg Television’s “On The Move” with Mark Barton. “As emerging-market currencies are selling off, people are unwinding those carry trades and having to close their short positions in euros.”
In carry trades, investors borrow in a currency with low interest rates to purchase a higher-yielding asset. The deals tend to depress the funding currency.
Rate Odds
Futures show traders see a 62 percent probability the Fed will raise its benchmark rate by the end of this year, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
A gauge of 20 emerging-market currencies -- including the ringgit, won, Czech koruna and South African rand -- has slumped 2.9 percent in August, set for its fourth straight month of declines.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, has fallen 1.4 percent since reaching a five-month high on Aug. 7.
“Definitely, the dollar’s strength will come against emerging-market currencies” rather than developed-nation peers, said Nudgem Richyal, a senior fund manager in Singapore at J O Hambro Capital Management, which oversees more than $20 billion. Dollar gauges focusing on rich-world currencies “will miss this.”
