The Financial Times reported that the rising strength of the dollar, linked to Donald Trump’s victory in the presidential elections, poses a major challenge to the debt markets of emerging economies.
According to JP Morgan estimates, investment funds in bonds denominated in dollars and local currencies in emerging markets witnessed outflows amounting to $5 billion during November, bringing the total outflows this year to more than $20 billion, after recording $31 billion in 2023. And $90 billion in 2022.
New American policies
According to the report, expectations of new economic policies that include tax cuts and the imposition of significant tariffs may push inflation higher in the United States, leading to a stronger dollar and higher Treasury bond yields.
US 10-year Treasury bond yields rose from 4.29% to 4.39% since the election results were announced with Trump’s victory, while 30-year bond yields rose from 4.45% to 4.58%.
Experts point out that these developments may lead to a decline in the value of currencies in emerging markets. For example, the South African rand fell by 4%, while the Mexican peso and Brazilian real both fell by about 2%.
Paul McNamara, director of emerging markets debt at GAM Investment Funds, explained to the newspaper, “All of this will negatively impact emerging markets, and it has not been fully priced yet.”
Challenges for emerging economies
One of the most prominent accompanying challenges is the impact of the strength of the dollar on borrowing costs in emerging markets, which prompts central banks in those countries to raise interest rates to attract capital.
For example, Brazil increased the pace of interest rate increases this month, while South Africa adopted a more cautious policy, despite cutting interest rates from historically high levels.
The Financial Times indicated that the JP Morgan index for local bond yields in emerging markets fell by 1% this year, which reflects the impact of these challenges on investors.
Despite these challenges, some analysts believe that the strength of the dollar may be temporary. According to Karthik Sankaran of the Quincy Institute, the discrepancy between US fiscal and monetary policies could lead to dollar weakness in the long term.
However, Sankaran stressed that the impact of the weak dollar may not appear soon enough to avoid the current pressures on emerging economies.
Changing investment strategies
In this context, BIMCO, one of the largest emerging market debt managers, recommended using bonds in emerging markets as a diversification tool rather than a source to search for high returns, according to the newspaper.
The company pointed out that policies such as the free floating of currencies, which were effective at the beginning of the first decade of the current century, no longer achieve the same positive results.
