A strong greenback and high Treasury yields are posing significant challenges
A strong U.S. dollar and high Treasury yields are posing significant challenges for emerging economies, and policymakers have no easy way to counter this powerful one-two punch.
History has shown that when trends like these take hold in emerging markets, they can create vicious cycles that accelerate rapidly and prove difficult to break.Just look at China and Brazil. Another difference is the fiscal headroom each has to generate growth. Brazil’s reluctance to cut spending sufficiently is a key cause of the real’s slump and the central bank’s eye-popping tightening. The market is forcing Brasilia’s hand.
As Reuters exclusively reported, China is mulling whether to let the yuan weaken in response to looming U.S. tariffs, and analysts at Capital Economics warn that it could tumble as low as 8.00 per dollar. The Institute of International Finance estimates that capital flows to emerging countries next year will decline to $716 billion from $944 billion this year, a fall of 24%.
Real interest rates are a lot higher now than they were during Trump’s first presidency. But many countries may still struggle to cut them, as doing so “could create financial stability concerns by putting pressure on exchange rates,” JP Morgan analysts warn.
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