How Will A Strengthening Dollar Affect Emerging Markets?

How Will A Strengthening Dollar Affect Emerging Markets?

Posted by Robin Powell on December 9, 2021

The US dollar has been strengthening, and commentators are predicting that it will strengthen further. The Federal Reserve is expected to raise interest rates, and higher rates are generally seen as a boon to the greenback, because they increase its attractiveness against other currencies.

Another big factor is the long-awaited tapering of the Fed’s quantitative easing programme. So what will tapering mean for emerging stock markets? BENEDEK VÖRÖS from S&P Dow Jones Indices has been looking at what happened when then-Fed Chairman Ben Bernanke revealed plans to taper QE in 2013, and what, if anything, that tells us about the likely impact on emerging markets this time.

“The dollar is our currency, but it’s your problem.”  — former U.S. Treasury Secretary John Connally

 When John Connally uttered the famous words above 50 years ago at a meeting of major finance ministers in Rome, it was just three months after the U.S. had unilaterally dismantled the post-World War II global monetary system known as Bretton Woods. The “problem” Connally referred to was a rapidly depreciating U.S. dollar, which threatened the competitiveness of exporters based in the U.S.’s main trading partners.

In the decades since, however, developing countries have faced the opposite challenge. Time and again, a bout of U.S. dollar strengthening has triggered turmoil in emerging economies that predominantly borrow abroad in foreign currencies, usually U.S. dollars. Thus, a strengthening U.S. dollar has increased emerging markets’ debt burden, depressing consumption and economic growth, and consequently leading to dismal domestic equity market returns.

The last such instance was triggered in May 2013, when then-Federal Reserve Chairman Ben Bernanke revealed plans to wind down the Fed’s gargantuan quantitative easing program, setting off a so-called “taper tantrum”: bond yields surged around the world, ex-U.S. stock prices tumbled, and a soaring greenback put severe strain on emerging market economies worldwide.

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https://www.evidenceinvestor.com/how-will-a-strengthening-dollar-affect-emerging-markets/