Emerging-Market Malaise Won’t Be Going Away Anytime Soon
Unless U.S. bond yields reverse and start to fall, the pressure on developing-nation financial assets will continue.
The dollar is wreaking havoc with emerging markets.
Photographer: Chung Sung-Jun/Getty Images
By my count, emerging-market currencies are in the midst of their fifth major weakening trend since 2011. The origins of the current downturn are broadly similar to the earlier four episodes, which is to say that a combination of rising U.S. Treasury yields, sluggish equity markets and risk aversion are to blame. What’s different now is that these factors may not dissipate as quickly.
The sensitivity of emerging-market currencies to higher rates is striking. Every major upward move in yields since 2011 has triggered currency weakness among countries with large current-account deficits. So unless there’s a recession or a serious slump that would reverse the rise in U.S. yields, the pressure is likely to continue. In the chart below, the shaded areas represent recent episodes of emerging-market currency weakness. The red line is an index of overall emerging-market currency valuations and the dark blue line is emerging-market currencies with current-account deficits. The light blue line denotes currencies of current-account surplus countries excluding China.