Summary: The turmoil in emerging markets, including declines in bonds and stocks, unpredictable political situations in Argentina and Ecuador, and global economic factors, is causing investors to reassess the risks associated with investing in these markets.
While strategic competitors in emerging markets are calling for change and the share of the US dollar held as official foreign exchange reserves has declined, it is unlikely that there will be a major shift in the US dollar's role as the central global currency due to the stability and reputation of the US government, as well as the challenges and limitations of other options like the renminbi.
The US Dollar strengthens as several BRIC countries express support for the currency, while Fed officials remain quiet on rate cuts, and geopolitical tensions boost the Greenback during US trading hours.
The Argentinian peso slips as investors await the International Monetary Fund (IMF) board's decision on the country's loan program, while stocks rise; Brazil approves fiscal rules to prevent public debt spike; South Africa announces expansion mechanisms for BRICS nations.
The Argentinian peso weakened against the dollar on the black market while stocks rose as investors awaited the approval of Argentina's loan program by the International Monetary Fund (IMF) board, following a staff level agreement in July.
Mexico's peso rose against the dollar after central bank minutes and inflation data indicated that interest rates would remain on hold for longer, while the BRICS group invited Argentina and five other countries to join the bloc.
Brazil's finance minister has proposed using Chinese yuan guarantees to reduce trade risks with Argentina, as the country faces a dollar shortage and its currency, the peso, continues to perform poorly in the global market.
El Salvador's experiment with making bitcoin an official currency is difficult to analyze due to its opaque nature and multiple objectives, including financial inclusion, revenue generation, and enhancing the president's reputation. The country has made bitcoin purchases, but the exact amount is unknown, and it has experienced a loss of value in its bitcoin investments. The government's digital wallet, Chivo, faced security issues, and the adoption of bitcoin for transactions and remittances has been limited. Comparatively, Argentina has surpassed El Salvador in terms of bitcoin adoption. The move to bitcoin has garnered attention for El Salvador but has also raised concerns about the lack of a coherent educational process for mass adoption.
Emerging-market central banks are resisting expectations of interest rate cuts, which is lowering the outlook for developing-nation bonds, as central banks in Asia and Latin America turn hawkish in response to the "higher-for-longer" stance taken by the Federal Reserve, currency pressures, and the threat of inflation.
The Brazilian real strengthened as iron ore prices rose, while Chile's peso weakened due to falling copper prices; Mexico's peso declined for the third consecutive session; Petrobras shares fell after the company halted some asset sales; Israel's shekel gained after the central bank left interest rates unchanged; trading volumes were low due to the Labor Day holiday in the US.
Argentina should avoid dollarizing its currency and learn from Ecuador's experience, as it could lead to a prolonged period of economic weakness, according to economist Robin Brooks.
Most Latin American currencies fell as the dollar strengthened on robust U.S. economic data, with the Mexican peso leading the declines, while Chile's peso gained after the central bank cut its benchmark interest rate and lowered its economic growth forecast for 2023.
Emerging market currencies are expected to struggle to recover from their losses this year due to high U.S. Treasury yields, safe-haven demand, and a slowing Chinese economy, keeping the dollar strong, according to a Reuters poll of FX analysts.
The U.S. dollar's share in global reserves has fallen below 60% for the first time in decades, as other currencies like the Euro, Pound, and Yen are on the rise due to a growing number of countries settling trade in their national currencies, driven by the de-dollarization process initiated by BRICS to end reliance on the U.S. dollar.
Argentina's peso currency is at risk of another devaluation after the upcoming presidential election, with estimates suggesting a 16.6% devaluation in the three months following the vote.
Latin American currencies are experiencing their worst week in four weeks due to the stronger US dollar and concerns about China's economic growth, with Chile's peso hitting a nine-month low, while Brazil's real slipped and Colombia's peso advanced slightly.
The Mexican peso and other Latin American currencies strengthened as a weaker dollar and positive economic data from China boosted metal prices and supported resource-rich countries in the region.
Argentina's dollar scarcity should not prevent the country from adopting the dollar as its currency, according to economist Francisco Zalles, who believes that dollars would flow back into Argentina once it makes the switch and that Javier Milei's plan to dollarize would be successful. However, other commentators have warned that adopting the dollar without ample reserves could have catastrophic consequences.
Argentina is facing skyrocketing inflation, with consumer prices soaring by 12.4 percent in August and an annual inflation rate of 124.4 percent, putting the ruling coalition on the defensive ahead of the upcoming presidential race.
Latin American currencies and stocks are set for their biggest weekly increases in months, benefiting from a stabilizing Chinese economy, rallying commodity prices, and expectations that the Federal Reserve will stop hiking rates.
Uruguay's central bank is thriving with low inflation, a strong currency, and a pivot towards interest rate easing, while Argentina's economy struggles, highlighting the diverging paths of the two neighboring countries.
Latin American currencies pared gains against the dollar as the U.S. Federal Reserve signaled tighter monetary policy, while Brazilian stocks rose ahead of a rate cut by the central bank.
A stronger US dollar has a significant negative impact on emerging market economies compared to smaller advanced economies, as it decreases economic output and trade volume, worsens credit availability and capital inflows, tightens monetary policy, and leads to stock-market declines. Emerging market economies with anchored inflation expectations or flexible exchange rate regimes fare better, and global current account balances decline with a stronger dollar, reflecting a contraction in global trade. Measures such as global safety nets and macroprudential policies can help mitigate these spillover effects.
Bitcoin's price in Argentine pesos has risen significantly, but due to high inflation rates in Argentina, it has not been a reliable store of value compared to the US dollar.
