Global | Resilience of currencies against the dollar

Summary

So far this year, despite the most aggressive interest rate hike cycle in history by the Federal Reserve (Fed), emerging currencies (with some exceptions) and the euro have strengthened significantly.

Key points

• Key points:
• This is partly due to signs that the Fed was nearing the end of the hiking cycle, which has reduced volatility and stimulated investors' search for returns.
• The upward momentum in emerging currencies has been largely driven by interest rate differentials, as many emerging economies have hiked rates more aggressively than the Fed to fight inflation.
• The euro has also shown significant strength, having appreciated against the US dollar. This is because this year the European Central Bank (ECB) has raised rates comparatively more than the Fed, which has resulted in a narrowing of the spread in bond yields between the US and Germany, the benchmark country in the eurozone.
• For the remainder of 2023, emerging central banks are expected to start their rate cutting cycles. As this is expected to be earlier than the Fed, this will narrow interest rate differentials vis-à-vis the United States and, in principle, it is most likely that these currencies will tend to depreciate gradually and in an orderly fashion in the latter part of the year.
• For the euro/dollar pair, the policies of both central banks will be the determining factor for the remainder of the year. Following the meetings at the end of July, there is a greater likelihood of additional rate hikes in Europe, while in the US it seems more likely that the cycle has come to an end, which will support the euro.

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