Dollar’s post-Fed swoon gives emerging markets some space

BLOOMBERG

A slump in the dollar after the Federal Reserve’s latest interest-rate hike will be a breath of fresh air for emerging-market policymakers as it puts a floor under their currencies and eases their efforts to control inflation.
The greenback weakened across the board, resuming a downtrend that started in earnest six months ago, and allowing the South Korean won, for example, to soar more than 2% to a one-month high. Such moves should make imports cheaper, helping to moderate price pressures.
Heading into the Fed decision, central banks across emerging Asia were already poised to slow their tightening cycles. Pulling off that task without undermining local currencies looks considerably easier with investors selling the dollar and betting a US banking crisis will see Fed rates peak out.
“The dovish hike from the Fed saw the dollar weaken, as markets view this as potentially the end of the tightening cycle,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. “Asian currencies are stronger as markets see the stresses with US regional banks as specific to the US.”
Swaps traders see Thailand and South Africa as the only emerging economies where key rates will be higher in six months’ time, each by just a quarter of a point. That’s down from four that were seen hiking at the start of this year.
The Philippine central bank, which hiked by a quarter-point as expected in a decision, was seen as a rare one across Asia for further tightening, given price pressures that remain at uncomfortably high levels. The peso has been the strongest among the most-active currencies across the region this year.
For other emerging Asia economies, the fresh dollar weakness makes a bigger difference. South Korea held rates but signalled further hikes were on the table even amid concern that the economy was starting to sag. In Indonesia, which paused for a second straight meeting, a bet on currency stability in the fragile external environment looks set to pay off.