Reports of a falling dollar may have been greatly exaggerated, and if that turns out to be the case, that’s bad news for Asia.
Global equities have rebounded strongly, bond yields and the dollar have fallen, and financial conditions have eased significantly over the past month as investors bet the Fed is laying the groundwork for the vaunted “pivot.”
The MSCI World index is up 15% since its low on October 13, while the MSCI Asia ex-Japan index has risen 15% over the past four weeks and is on track for its best month since. May 2009.
Big banks are starting to publish their outlook for 2023, and currency analysts from HSBC and Morgan Stanley are among those who believe the dollar is peaking and will weaken next year.
But recent rtoric from Fed officials has been downright hawkish – even from former “doves” like San Francisco Fed President Mary Daly – and it wouldn’t be surprising if the dollar resumed its rally from 2022 the end of the year.
This compounds the problems that Asian markets and policymakers have faced all year – historically low exchange rates, foreign exchange market interventions, growing inflationary pressures and rising domestic interest rates amid a low growth.
If the Fed isn’t as close to the end of its hike cycle as previously thought, most Asian central banks won’t be either. Asian powers Japan and China are easing their policies, of course, and their currencies and foreign exchange reserves are taking a hit.
It is once morest this general backdrop that the Bank of Korea is meeting later this week. All but one of the forecasts in a Archyde.com poll call for a 25 basis point hike to 3.25%.
BOK policymakers and other players in the region will be comforted by falling world oil and commodity prices. But if Fed hawks and dollar bulls set the tone in the market, they may have to tighten policy more than they had anticipated.
Emerging market exchange rates
Three key developments that might give markets more direction on Monday:
– Daly’s speech from the Fed
– The American Treasury is auctioning 2-year and 5-year notes.
– Germany PPI inflation (October)
