US Dollar Forecast: CPI Data Risks Souring Emerging Market Sentiment, Currencies

The US Dollar outperformed against some of its ASEAN counterparts to start off 2022. Gains were seen against the Singapore Dollar, Thai Baht, Indonesian Rupiah and Philippine Peso. A deterioration in ASEAN market sentiment likely played a key factor – see chart below.

This poses a risk to Emerging Markets as it threatens capital outflows from the region. When the Fed raises rates, returns on safer Treasury yields tend to follow, especially on the front end of the curve. As a result, investing in the stock market becomes more costly as the ‘risk-free’ rate rises. As such, traders may pull away or unwind their riskiest exposure, which Emerging Markets tend to fall under.

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