Vivek Maishra

BENGALURU (Reuters), – The Federal Reserve’s rising expectations of raising interest rates to combat inflation will cause more problems for emerging markets currencies next year, according to a Reuters poll. This is likely to continue to support the mighty U.S. dollars.

The majority of emerging market currencies are expected to lose or at most cling to a range in 2014, as currency strategists polled by Reuters Oct. 29-Nov. 2, fearing that high commodity prices will further pressure already troubled economies with rising inflation.

As investors believe that rising U.S. Treasury yields could be a headwind to EM currencies’ ability to trade, they may also increase the risk of EM currencies being affected by higher U.S. Inflation.

“The worst for EM currencies is still ahead of us as growth and inflation problems persist into 2022 while they are expected to march relentlessly higher through the next year,” stated Phoenix Kalen (OTC), head emerging market research at Societe Generale.

However, a lot of it will be dependent on the U.S. dollars’ performance. As inflation worries rise and rising energy costs threaten global economic growth, the greenback is expected to continue to be dominant currency markets for at least another year. [EUR/POLL]

In a research note, Luis Costa of Citi’s emerging market strategist wrote that a pro-USD climate in G10 FX could continue to be a threat for EMFX.

Our negative EMFX outlook was founded on increased U.S. rates, and continuing growth worries in China. There is risk of higher U.S. real rates, but it’s hard not to see China experiencing much less growth.

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It was forecast that the most active traded emerging market currency,, would fall more than 1% to 6.47 USD per year, as the economy continues to slow after an impressive rebound from the pandemic driven slump in early 2013.

Asia’s economic prospects were already marred by China’s slowdown, supply-chain bottlenecks, and the long-lasting effects of COVID-19 waves within trade-reliant economies.

After a plunge of 10% in value, the Thai Baht was forecast to drop 1.5% further to 33.77/$ over the next six-months. Over 2.0% of the Indian rupee had fallen. It was predicted that it would fall another 1.0% to $75.28/$ over the course of a year.

Turkey’s battered Lira has seen a loss of a fifth this year. It was also expected that it would lose another 6%, or 10.09/$, in one year.

Due to President Tayyip Erdogan’s unconventional monetary policy – lowering interest rates in order to combat inflation – the lira was among the lowest-performing currencies within EM this year. The central bank chief has been replaced three times by Erdogan in the last two and a half years.

Ehsan Khoman from MUFG’s emerging market research, stated that Erdogan’s recent decisions to remove more CBRT officers have undermined trust in monetary independence. He said these actions had further undermined the belief in monetary autonomy which will prioritize stronger growth over dampening inflation.

“In these circumstances we expect the currency to continue falling with an increased risk of overshooting.”

While most emerging market currencies continue to be under severe pressure, there are a few that will see stronger growth in 2022. These include the South African rand (South African won), the Russian ruble and the South Korean won.

Even though the U.S. Fed appears to be poised to begin decreasing its $120 million a month bond buying programme, this has sent U.S. bond yields up and the dollar higher ahead of an expected rate rise next year.

Expected to strengthen the South African rand (and Korean won) by more than 2% over the next year, to 15.10/$ & 1141.84/$ respectively. The Russian ruble will see a nearly 1% increase to 71.16/$.

(To see other stories in the November Reuters foreign-exchange poll, click here