Date
26 July 2017
The Malaysian ringgit fell 28 percent against the US dollar at one point amid a financial scandal involving Prime Minister Najib Razak. Photo: HKEJ
The Malaysian ringgit fell 28 percent against the US dollar at one point amid a financial scandal involving Prime Minister Najib Razak. Photo: HKEJ

Emerging market currencies catch breath on US rate hike delay

When Federal Reserve chief Janet Yellen said in May that the US economy was continuing to improve, she set off market forecasts for an autumn rate hike.

“It will be appropriate at some point this year to take the initial step to raise the federal funds rate,” Yellen said then.

Most agreed a liftoff could happen before the year is out, especially given a job market that is close to full employment.

Although Yellen did not say it, she sent a signal that an interest rate increase was coming anytime soon and the timing was the only thing yet to be decided.

Investors took her statement positively. The US Dollar Index punched through 100.

Other major currencies such as the Japanese yen, British pound, Canadian dollar, Swiss franc and Swedish krona fell.

Some investors withdrew funds from emerging markets in Asia, resulting in notable falls in those countries’ currencies.

Even the Singapore dollar and the yen, which usually have low volatility, slipped as much 9.24 percent and 8.63 percent, respectively.

The Malaysian ringgit plunged 28 percent amid a financial scandal involving Prime Minister Najib Razak.

The US Dollar Index has eased to about 94.06 to 96.7 in the past two months, no doubt affected by recent data and new statements from top Fed officials.

In recent months, US export growth has sputtered and the consumer price index remains low.

Non-agriculture employment has slowed for five consecutive months.

These developments have raised doubts about whether US growth can stay on track amid a sluggish global economy.

More importantly, although 13 of the 17 members of the Fed’s policy-setting committee believe an interest rate hike can happen this year, they have been more dovish lately.

Market expectations for a rate hike are clearly dissipating.

In a poll by Bloomberg, just 10 percent of respondents now think a liftoff will happen in October. About 35 percent expect it to come in December.

As the US economy weakens, emerging markets will see a stronger currency, attracting international investors.

Overall exchange rates have bounced back 3 percent since the end of September.

We need to keep in mind, however, that capital liquidity can influence exchange rates, especially in emerging markets.

In addition, any moves by Chinese regulators on economic policy will directly impact investor expectations for a US rate hike this year.

This article appeared in the Hong Kong Economic Journal on Oct. 15.

Translation by Myssie You

[Chinese version中文版]

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MY/JP/RA

FX specialist, HSBC Global Banking and Markets

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