Aaron Kohr/Adobe Stock
Emerging-market finance ministers must have woken up with a groan Thursday morning as news of yesterday’s Fed hike will have blipped up on their news feeds (that is, if they weren’t up late into the night their time listening to the outcome of last Wednesday’s Federal Reserve meeting).
The Fed raised the target range for the federal funds rate by 25 bps from 2% to 2.25% during its meeting last week and announced its plans to steadily tighten monetary policy remain intact. Most expect that to mean another rate hike in December, followed by three more next year, and possibly one increase in 2020.
However, worrying as that is for emerging-market debt, the 10-year U.S. Treasuries yield still fell more than 5 bps to 3.048% as the market had expected a more hawkish stance, The Telegraph reports.
The U.S. economy continues to fire on all cylinders as Gross Domestic Product (GDP) expanded at an annualized rate of 4.2%, marking the most rapid growth seen for four years, according to The Telegraph, quoting the U.S. Bureau of Economic Analysis.
The U.S. economy is being fueled by corporate and personal tax cuts stimulating an improving labor market, rising wages, and house inflation with sales of new single-family houses rising 3.5% last month.
It is not just emerging-market currencies that are on a slide against the dollar.
The Euro took a self-inflicted hit this week as markets took fright as Italy’s populists parties ramped up pressure to raise spending in the upcoming budget. The markets had thought cool heads would prevail, that the technocrats in the government would put forward a more restrained budget plan in an attempt to maintain investor confidence.
But last week Liga put its weight behind its coalition partner Five Star’s attempt to ramp up spending to fund social programs. The markets are concerned over Italy’s 132% debt-to-GDP ratio, which is the second-largest in Europe after Greece, a Telegraph report states.
Emerging-market currencies, though, are particularly at risk of a rising dollar.
Italy is largely protected by its membership of the Euro, but that is not so for Turkey, South Africa, the Russian rouble or Argentinian peso, all of which have taken a pasting in the face of an ever-stronger dollar.
As the dollar rises, these emerging-market economies face not only higher interest charges on their foreign debts but a weaker currency to buy the dollars to make repayments — a double whammy of rising costs that some fear will cause a meltdown of emerging-market debt and a rout of the junk debt market.