Relentless Dollar Surge Continues: Asian Currencies Plunge To 7 Year Lows, Hitting Emerging Markets

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While most global equity markets were subdued due to the US Thaksgiving holiday, the FX world was very busy overnight, marked by the relentless dollar surge on expectations of a rate hike not only in December but further in 2017, sending Asian currencies to the weakest level in 7 years: the Bloomberg-JPMorgan Asia Dollar Index reached 103.32, the lowest level since March 2009.

The regional FX plunge will likely deter regional central banks from easing monetary policies as the prospects of higher U.S. rates spurred capital outflows according to Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute who added that depreciating currencies are making it very hard for central banks to ease on concerns about inflationary pressure and acceleration of fund outflows.

The dollar also pushed its way past more of last year's peaks against the euro to hit $1.0550 in early European action, with only the March 2015 high of $1.0457 standing in the way of a drive toward parity, likewise the yen skidded to an eight-month low and China's yuan to an 8-1/2 year low, while the highly sensitive Turkish lira and Indian rupee hit new historic troughs, although the USD has since given up some of the gains.

"There doesn't seem to be anything stopping U.S. yields going higher in the near-term so I think people are going to stay on the dollar trend," said Michael Metcalfe, head of global macro strategy at State Street Global Markets.

"The only risk to this are that the dislocations in markets outside of the U.S., particularly in emerging markets, get to a point where they start to feed back into concerns (for the Federal Reserve as it looks to raise interest rates)," he said.

While so far US equity markets have ignored the jump in the DXY to a near 14 year highs, dollar gains reverberated through emerging markets. India’s rupee and Vietnam’s dong slid to records, while the Philippine peso dropped to its weakest level in eight years. In Turkey, the lira rebounded from an all-time low after the central bank unexpectedly raised interest rates, although even that move has now been faded. Copper’s surge pulled a gauge of commodities higher for a fourth day, the longest rally in a month. Rosneft PJSC approved a $17 billion bond program, the biggest ever by a Russian company as the nation’s largest oil producer refinances debt. Copper was set to close at its highest level in more than a year.

As Bloomberg writes this morning, central banks worldwide are being pushed to take action in the face of the stronger dollar.

In Turkey, policy makers opted to support the nation’s beleaguered currency, while the European Central Bank warned that the risk of an abrupt global market correction on the back of rising political uncertainty has intensified, posing a threat to banks, stability and economic growth. The market odds of a December rate hike in the U.S. are 100 percent and traders are adding to bets that Fed Chair Janet Yellen will lead further action in 2017. U.S. equity benchmarks extended records last session before the Thanksgiving holiday.

“The dollar has been really strong in anticipation of Yellen’s move next month and that strength in the U.S. dollar is ultimately going to mean that emerging-market assets would be seen as disadvantaged,” said Nicholas Teo, a strategist at KGI Fraser Securities in Singapore.

The Stoxx Europe 600 Index added 0.1 percent, while Japan’s Topix index climbed for a 10th straight day, on the back of the ongoing surge in the USDJPY, its longest streak since June 2015. Europe’s top equity market this month, Greece, is giving signs of overheating: A technical indicator hit its most-overbought level since October 2013, meaning that gains might have come too quickly to be maintained.

US equity futures were unchanged at 2201.

European sovereign bonds were broadly higher as ECB Governing Council Member Francois Villeroy de Galhau was quoted by Expansion as saying the central bank was mulling many options for its debt-purchase program. They partially reversed a selloff from Wednesday that was fueled by a report that the ECB is planning to lend out securities in an effort to boost bond-market liquidity and reduce shortages in the repurchase market. France’s 10-year bond yield fell three basis points to 0.76 percent. Portugal led gains in the region, with the nation’s 10-year yield falling nine basis points to 3.59 percent. Indonesia’s 10-year sovereign bonds retreated for a sixth day, sending yields to the highest since March 2.