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<\/a><\/p>\nThe Fed\u2019s trade-weighted dollar index versus advanced economies has soared 10% this year to the strongest since 2002, while the emerging-markets measure is up a more modest 3.7% and remains well below its peak from the 2020 pandemic.<\/p>\n
While some of the world\u2019s worst-performing currencies this year are from developing economies such as Sri Lanka, the outperformance of commodity-backed currencies such as Brazil\u2019s real and Russia\u2019s ruble have bolstered the EM grouping.<\/p>\n
\u201cJust by raising policy rates, other countries are unlikely to stop the depreciation of their currencies,\u201d said Sayuri Shirai, a former Bank of Japan board member who\u2019s now a Keio University professor.<\/p>\n
That\u2019s because \u201cdollar strength not only reflects an expectation about the federal funds rate hikes this year — and thus higher demand for US fixed-income assets – but also reflects global recessionary risks arising from the greater-than-previously-expected policy rate hikes around the world,\u201d she said.<\/p>\n
That conundrum will be illustrated in the coming days as the European Central Bank considers a record 75 basis-point rate increase while it contends with record inflation and the euro below parity with the dollar. The Bank of Canada is tipped to rise by the same amount and the Reserve Bank of Australia just delivered another half-percentage point rate hike.<\/p>\n
In the UK – which is already in a recession, according to a business lobby group – the Bank of England may tighten further on Sept. 15 as it confronts a loss of faith from investors that\u2019s pushed the pound to the brink of its lowest since 1985.<\/p>\n
And the yen\u2019s drop to a quarter-century low is making it tougher by the day for BOJ Governor Haruhiko Kuroda to stick to his line that massive monetary support is still needed, even in the face of rising prices.<\/p>\n
With the Fed not done hiking yet, relief on the currency front for the world\u2019s central bankers may only come once US counterparts get consumer prices under control.<\/p>\n Since it became clear the Fed would switch to tightening mode about a year ago, developed-market currencies have struggled at least as much as their emerging-nation counterparts. Across 31 major exchange rates tracked by Bloomberg, four developed ones were among the 10 biggest losers and only one, the Canadian dollar, among the 10 best performers.<\/p>\n For central banks such as the ECB, whose currency is the most traded with the dollar, the current energy crisis has provided its policymakers with a particularly sharp reminder of the euro\u2019s role as a channel for inflation – not least because of the greenback\u2019s use in denominating global commodity prices.<\/p>\n \u201cI would argue that, in this particular situation of an energy-supply shock, the exchange rate matters more,\u201d ECB Executive Board member Isabel Schnabel told Reuters last month when asked about previous research suggesting the pass-through to inflation has lessened.<\/p>\n Japan, whose currency is the second-most traded with the dollar, is feeling the brunt too. Having surged past the 143 level, the currency is not far from the 146 mark that prompted joint action with the US in 1998 to prop it up. It also raises the odds of inflation topping 3% – well above Kuroda\u2019s 2% target.<\/p>\n While the BOJ chief insists that a recent supply-driven increase in consumer prices won\u2019t last, households and businesses are becoming more and more restless as the yen\u2019s dive turbo-charges soaring energy and import costs. Officials are warning against excessive volatility.<\/p>\n \u201cSudden moves in the foreign-exchange market are not desirable,\u201d Japan Finance Minister Shunichi Suzuki told reporters after an online meeting of G-7 finance ministers. \u201cRecent moves in the foreign-exchange markets are a little on the large side,\u201d he said.<\/p>\n The bigger concern for many countries could be that local rate hikes may do little to slam the brakes on their nose-diving currencies because their economies look more fragile than the US.<\/p>\n The British pound is on the verge of dropping past its March 2020 low, despite swaps traders pricing for the BOE to out-hike the Fed, with bets showing the UK\u2019s benchmark will top 4.25% within six months, exceeding the 4% in the US by then.<\/p>\n While many emerging economies have felt the brunt of rising rates and inflation, they have broadly weathered the Fed\u2019s hiking cycle better than past episodes, so far at least, helped by beefier foreign-exchange reserves and fast moves to raise rates before the Fed.<\/p>\n Some, such as Chile and India, have also intervened to support their currencies – something that\u2019s politically harder for developed-nation peers.<\/p>\n One possibility for relief would be a slowdown in the US economy that takes the steam out of the Fed\u2019s pace of tightening, and by extension causes the dollar to weaken.<\/p>\n<\/a><\/p>\n<\/a><\/p>\n