U.S. dollar pause paves way for emerging market respite

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A softer greenback eases some significant pressure

Brazilian markets are grabbing the headlines, leading investors’ stampede back into riskier assets following the first round of voting in the country’s presidential election.

To be clear, the environment for emerging markets remains challenging as the Federal Reserve spearheads the tightening of global financial conditions. According to the Bank for International Settlements, non-financial dollar-denominated debt in emerging economies stands at $4.2 trillion. That may already be underway. The dollar’s value against a basket of major currencies has fallen five days in a row. That doesn’t sound like much, but it is the longest downturn in over a year.U.S. inflation expectations are falling steadily and significantly, consumer and market-based measures show. Breakeven inflation rates across the two- to 20-year spectrum on Friday slumped to 2.15%, the lowest in a year and a half and within sight of the Fed’s 2% medium term target.

From India to South Korea, Chile to Brazil, emerging market central banks have sold billions of dollars for domestic currency recently. JP Morgan analysts say emerging economies’ FX reserves are dwindling at the fastest pace in two decades.

 

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