Investors warn strong US dollar set to hit emerging market bonds

A Financial Times report revealed that investors are concerned about a stronger US dollar under incoming president Donald Trump’s presidency. The report highlighted that investors expect a stronger dollar to disrupt the returns coming from emerging market bonds. 

The report revealed that investors are also worried about the possible outflows that a strong dollar could trigger. It pointed out that developed countries have had a long period of high interest rates. A JPMorgan report indicated that higher rates in developed countries attract funds that would have otherwise gone into emerging markets. 

JPMorgan also released data on net outflows in emerging markets over the past few years. On November 8, emerging market bonds recorded $3.2 billion in net outflows, the largest outflow in about two years. The JPMorgan report mentioned that investors expected emerging market assets to be under pressure from Trump’s policies. This year, the total outflows from emerging market bonds have hit $20 billion, lower than 2023’s $31 billion and 2022’s $90 billion.  

The global markets have been dealing with Trump trades, which is a euphoric state for investors in stocks, crypto, and equity markets. A Reuters post revealed that tax cuts and less stringent regulations have contributed to the euphoria. However, the expected inflation from Trump’s policies may fuel the strength of the dollar and a spike in U.S. Treasury yields. 

Several currencies weaken against the US dollar

US DOLLAR WRECKING BALL

The USD has hurt emerging markets – Mexico, Brazil, China, and even Europe

Compare their stock market to the United States

Take a look at interest rate cut expectations

They have dwindled. So the US Dollar could top out soon$EWZ $EEM $EWW $FXI $SPY… pic.twitter.com/KgUMFAe3gm

— Ram Ahluwalia CFA, Lumida (@ramahluwalia) November 22, 2024

Multiple currencies, including the Euro, the Brazilian Real, and the Japanese Yen, are weakening as the US dollar’s strength increases. The dollar has been crushing other currencies since the Fed began cutting rates aggressively in September. Notably, the Fed also cut rates in November, with economists forecasting more rate cuts until mid-2025. 

Local currencies involved in emerging bond markets are feeling most of the pressure. Emerging debt manager Paul McNamara from GAM explained the downward pressure tariffs will exert on emerging market currencies. McNamara insisted on the negative impact the reduced ‘debt investors’ returns in dollar terms,’ which would have on emerging markets. 

That said, multiple emerging market currencies are 4% down against the US dollar. The Brazilian Real and Mexican Peso are down by around 2%. On the other hand, the South African Rand is down at least 4% against the dollar. 

The Euro also recently hit a two-year low against the dollar amid political tensions in Europe. On November 22, the EUR traded just above $1.03 against the dollar, the lowest since November 2022.

Trump still wants a weaker US dollar

During the last term of Trump’s presidency, the president-elect insisted on the need for a weaker dollar to fuel the country’s business with other countries. In 2019, Trump mentioned that a strong dollar would be great for the U.S.; a very strong dollar would discourage international business with the country. 

At the time, Trump had accused China and European countries of devaluing their currencies to compete with the U.S. In his opinion, the incoming president said that the country should match the currency manipulations other countries allegedly engaged in. 

“We should MATCH, or continue being the dummies who sit back and politely watch as other countries continue to play their games – as they have for many years!”

–Donald Trump, U.S. President-elect

During his presidential campaign this year, the president-elect shared his mission of weakening the dollar. However, a Wall Street Journal report outlined that Trump might not be able to achieve a weaker dollar. More importantly, the report discussed how the current trend in U.S. markets might achieve the opposite effect.

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