Market Focus
2018 August
The thing that always come with crisis in emerging markets is strong US dollar. Looking back at the previous dollar rising cycle in the mid-1990s (at the time when the dollar index rose from 80 to the peak of 120), Brazil, Mexico, Argentina, Asian countries, and even Russia spiralled into financial crisis one after each other.
Strong dollar not only attracts capital back to US dollar assets but also increases the foreign-currency-debt burden of these emerging countries. Take the protagonist of Turkey as an example. Its foreign currency debt accounts for 40% of GDP, and its foreign currency loans held by banks also account for 40% of its total assets. In the case of sharp decline in the Turkish lira, the risk of foreign currency loans turning into bad debts has increased significantly.
The turmoil in Turkey could stoke a contagion and bring about a crisis of confidence in other weaker EM economies. At the same time, Europe will also face a greater impact. Turkey is Europe’s sixth-largest trading partner, and European banks, especially Spanish and French banks, also have a considerable amount of loan linked to Turkey. In Asia, as the lessons of the financial crisis in 1998 have been learned, the current debt and financial situation of Asian countries have been greatly improved. Therefore, the impact of this shock on Asia is relatively affordable.
The US economy proudly stood out compared against others and hence the interest rate differential is expected to keep widening across major currencies. As a result, the strong dollar trend could hardly reverse in the short term. Investors should maintain a diversified portfolio to cope with the volatility in near future
What is the implication of the Dollar Index?
The Dollar Index is a comprehensive measure of the exchange rate of the US dollar in the international foreign exchange market. It calculates the weighted average of the US dollar against the six major international currencies (Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc).
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