Relief rally in EM currencies temporary, USD charges to new 2018 highs

The relief rally that allowed emerging market currencies to regain their composure after a very nervous reaction from investors to the Turkish Lira crisis appears to have been temporary. The majority of emerging market currencies across Asia are trending lower at time of writing, as the political dispute between Turkey and the United States heats up and the US Dollar charges to another milestone high for 2018. The softness in the emerging market currencies will likely spread into the EMEA region when European markets open today and possibly Latin America FX when Wall Street opens this afternoon.

The only real exception to the weakness in the emerging market FX space in Asia has been the Indian Rupee, which is marginally higher against the US Dollar after hitting a new all-time low earlier in the week. When you consider that the Dollar is charging ahead against the majority of its counterparts after reaching another 2018 high, suspicions will be present in the market that the Reserve Bank of India (RBI) might have intervened in the FX market to strengthen the Indian Rupee. Bank Indonesia (BI) have only moments ago raised interest rates in an effort to defend the Indonesian Rupiah from further weakness. Previous attempts from BI to change monetary policy have previously been rejected by investors, mostly because of the continued USD buying drive.

Elsewhere, the Turkish Lira continues to rapidly seesaw in momentum, but appears on track to be attempting its third successive day of gains against the US Dollar after the Turkish Lira crisis attracted the world’s attention. The gains in the Lira have come in spite of Turkey increasing tariffs on imports across a range of different US products. It will be interesting to monitor whether a potential response to this from the Trump administration later down the line rattles the markets.

The escalation of both diplomatic and trade tensions between the United States and Turkey has reminded investors that it is not just the United States and China that stand at the heart of the global trade war concerns. There are many other economies across the globe that feel aggravated by the protectionist nature of the Trump administration.

One question that is emerging across the headlines for investors to take into accountas the Dollar hits another high for 2018 is - exactly how long can the Dollar rally continue? A stronger Dollar is the opposite of what the Trump administration wants to see, and there is an argument to be made that it offsets both the fiscal stimulus that Trump has encouraged alongside the protectionist policies as the price of imports into the United States increases.

I would be very surprised if President Trump himself doesn’t repeat his discontent with USD strength in the near future.