Don't expect the emerging market FX rally to last

Summary

In somethng of a surprise, the U.S. dollar has weakened over the first few weeks of this year and emerging market currencies have outperformed. A sharp shift in monetary policy stance from the Fed supported the greenback late last year but has done little to help the dollar so far in 2022; however, once the "buy the rumor, sell the fact" dynamics come to an end and markets focus on underlying fundamentals, the U.S. dollar should strengthen going forward. We also expect emerging market currencies to come under the most pressure in 2022-2023 as tighter Fed policy, higher bond yields and local political developments result in weaker currencies across the emerging markets spectrum.

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