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Dollar’s strength hits emerging markets

Key points:

  • Emerging markets have been suffering from the global tightening of financial conditions (rising US yield and dollar)
  • At this stage, the sell-off remains differentiated and the impact on growth is manageable
  • Buyoant US growth and inflation at target confirm quarterly Fed hiking pace until mid-2019; other main central banks have also confirmed their gradual monetary normalisation trajectory
  • We maintain our asset allocation, with an overweight US and emerging market equities vs. an underweight euro fixed income

The return of US dollar pain

Five years ago1, Professor Hélène Rey reminded central bankers gathered at Jackson Hole, of how the close interconnection of capital markets represented a facilitator in the transmission of shocks, initiated at the global centre of monetary policy, the US Federal Reserve (Fed). The tightening of global financial conditions, id est the rise in US yields and the appreciation of the US dollar, is therefore the most obvious trigger behind the recent emerging market (EM) sell-off. However US-led protectionism, which risks disrupting the global supply chain, as well as worries of China’s internal demand slowing down faster than expected – and a collection of other idiosyncratic stories – clearly did not help EMs either.

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[1] Rey, H., “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, NBER, last revised in Feb 2018

1 Rey, H., “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence”, NBER, last revised in Feb 2018



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