London, 12 September, 2018:
Global financial markets have undergone a major transformation in the last couple of years and the biggest surprise of this transformation is a strong comeback of the US dollar – largely on the back of strong US economy and the protectionist policies of the Donald Trump Administration.
From relative weakness during the last year the US dollar has displayed remarkable strength in 2018, leading to the weakness in the currencies of Emerging Markets as well as Developing Markets.
|Performance of a Select Developed Market Currencies Against the Dollar (YTD)
|31 Dec 2017
|23 Aug 2018
|JPY Japan [Japanese yen]
|HKD Hong-Kong [Hong Kong dollar]
|SGD Singapore [Singapore dollar]
|EUR Euroland [Euro]
|CAD Canada [Canadian dollar]
|GBP Great-Britain [Pound sterling]
|AUD Australia [Australian dollar]
Among the developed economies, the Australian dollar has been one of the worst performing currency, having lost about 7% against the US dollar year-to-date, thus impacting the Australians’ overseas spending, especially in the US. Meanwhile, on the positive side, the Australian businesses exporting goods overseas stand to gain from a weak Australian dollar, making their products more attractive.
Among the Emerging Markets, the Turkish Lira has been the biggest loser, having lost more than half its value against the greenback since the beginning of 2017. Lira’s depreciation against the US dollar is stoking fears that its troubles could spread to the other countries.
It is feared that the strength of the US dollar may have an impact on the economies of the countries with large trade deficits and/or massive foreign debts. The increase in the value of the US dollar means an equivalent increase in the cost of servicing the dollar debt in the local currency. A contagion of Turkey’s trouble may undermine the global economic system, potentially causing defaults or even bankruptcies, causing serious damage to global economic growth. The Corporate America fears that its growth may slow if the economies of America’s trading partners are impacted. European banking/corporate interests may also get affected due to their exposure to the Turkey’s economy.
Says Prajit Nanu, Co-founder & CEO of InstaReM, a leading digital cross-border payments firm, “In a connected world, which country can risk a slowdown? The answer is simply no one! While contagion risk is ruled out for now, as the Turkey crisis may be unique to its circumstances, it is prudent to stay alert to the signs of deterioration in the currencies of the economies that are similar to Turkey.”
While the currencies of the developed economies are not so vulnerable, most Emerging Markets have an array of monetary tools – unlike in the past – to prevent them from meeting the fate of the Turkish Lira.
To find out more about the comeback of the US dollar this year, the countdown to the Turkish crisis and which countries are the most vulnerable to the strengthening dollar, visit the InstaReM blog here: https://www.instarem.com/blog/what-a-strong-us-dollar-means-for-other-currencies/