Euro, Dollar, and the Emerging Markets Today

The euro’s value in the stock market has increased against the dollar on Thursday, Sept 24, having been strengthened by the downplaying of the European Central Bank (ECB) as they need further monetary stimulus soon.

However, the reason it gains against the yen is said to be due to the Japanese investors returning from the holidays and booking profits for the European unit.

Kaneo Ogino, the director of the Global-info Co in Tokyo, a foreign exchange research firm, said, “The euro is still a carry currency, so its gains might not last. Some people think that anytime the euro rises, it’s a good time to go short, to build short positions.”

According to Ogino, the trading volume was thin on Thursday as the Singapore markets were closed for the holidays and Tokyo reopens for the first time this week.

The euro bounced over $1.1200 overnight which was previously $1.1188; thereby, pulling away from $1.1105 that was Wednesday’s session low; it’s lowest since September 4th.

Mario Draghi, the president of ECB, said that although there are risks of inflation and risks to growth outlook for the European market primarily due to its slowdown, their bank may need enough time before they decide which action they should take.

The concerns regarding China, as well as other emerging markets, may lead to a weaker economy. The dollar currency has slipped against a bunch of other major currencies, including the Euro and Japanese yen, as the risk to global growth resulted to traders selling their risky assets, favoring those lower-yielding currencies.

The weakening of the dollar, after the Federal Reserve of the US intended to strengthen the monetary policy through increasing rates, has made it less favorable in terms of being a funding currency, according to several analysts. Furthermore, this move by the Fed increased worries on the global economy last week, thereby increasing anxiety in the market.

Ihav Salib, the head of international income at Federal Investors in Pittsburgh, responsible for its currency management, said, “You have all these uncertainties, and on top of that, you had a Fed that had a chance to give you some certainty.”

Meanwhile, the dollar experienced reverse gains against the Brazilian real and Mexican peso since they have hit record highs against the risky currencies from emerging markets early in the session.

According to Washington’s Western Union Business Solution senior market analyst Joe Manimbo, the rebound of the peso and real may be due to the traders taking their profits from their gains from the dollar.

The dollar index that measures the currency against 6 major ones was down 0.10% at 95.970.

The currencies of emerging markets such as Brazil, South Africa, and Turkey has their new lows against the US dollar due to growing concerns of pessimism because of global economic outlook.

The Brazilian real declined further 1.2% which was recorded as their lowest since 1994. The decline can also be noted in South Africa and Turkey as they also hit record lows. Indonesian and Malaysian currencies also declined as well.

Investor confidence has been declining from the leading emerging markets for most of the past year as the prices of various commodities declined. However, this trend has gained momentum ever since the US Federal Reserve announced their global concerns during the policy meeting that was held last week.

Bernd Berg, the EM FX strategist of Societe Generale, said, “Fundamentals for EM currencies are the worst in decades and this global bloodbath in EM FX will continue over the next weeks.”

However, some FX analysts predict that the decision of the Fed last week not to increase interest rates may start a relief rally and time for stability among EM currencies.

According to the EM strategist at Commerzbank, Peter Kinsella, all the Fed has caused is to keep uncertainty and high vitality levels “because we still don’t know how and to what extent they will hike rates.”

“Now people realise there is no fundamental reason for any EM FX rally and are forced to close their short US dollar positions initiated ahead of the Fed meeting.”

There are increasing signs of central banks to try to take these matters into their own hands. Last Tuesday, the central bank of Brazil has begun to auction $2 billion currency swaps. Several analysts, on the other hand, expect Mexico to extend their dollar auction programme which started in the summer in order to increase the value of the peso.

However, the market was still unconvinced as peso and real still continues to fall. Mr. Kinsella said, “You can get an idea of the lack of confidence in the authorities to control events by the way the market reacted to yesterday’s swap programme announcement in Brazil.”

Norway, on the other hand, cut their rates and signaled that there are more cuts for the next weeks. Barclays said that the Norges Bank is showing its willingness to utilize stimulus “to compensate for a likely deterioration in economic activity driven by lower petroleum investments.”

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