NEW YORK : As the U.S. dollar tumbles from multi-decade highs, some investors are betting emerging market currencies will be big winners from a sustained reversal in the greenback.
"The planets are lining up for a dollar bear market," said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US. In addition to the possibility of slower Fed hikes, investors cited expectations that China will loosen its strict COVID-19 containment policy and comparatively rich yields found in many EM countries as reasons for adding to positions in emerging market currencies.
The Chinese yuan is up about 5 per cent against the dollar since late October and posted its best weekly performance against the U.S. currency in at least two decades on Friday, while the Hang Seng Index rose 27 per cent in November, its best month since October 1998. Some investors think it may be too early to bet on a sustained dollar reversal. While Fed Chair Jerome Powell said last week it was time to slow the pace of coming interest rate hikes, the central bank could raise rates further than previously anticipated as it fights the worst inflation in decades.
Conversely, tightening by central banks around the world also risks sparking a global recession, a scenario some believe could hurt emerging market currencies and help the dollar.