Dollar Debasement Frees EM Currencies From Treasuries' Weight
By Aboki Forex —
US Treasuries and emerging-market currencies are diverging the most in more than four years, as higher yields fail to fuel the dollar's strength like they once did. A Bloomberg gauge of Treasuries is headed for a quarterly loss, while MSCI's benchmark for emerging-market currencies is on track for its biggest quarterly gain in over a year.
The correlation between the two has turned most negative since the first quarter of 2022, according to data compiled by Bloomberg. Developing nations have attracted global flows this year as investors seek higher yields and diversify away from dollar-denominated assets.
Why the old link broke
Higher US yields would typically diminish the appeal of emerging-market assets. But that relationship has broken down as Treasuries come under pressure for reasons other than a hawkish Federal Reserve. Investors increasingly expect the US government to address its debt and deficit burden through inflationary and accommodative policies, such as bond buybacks, that would erode the dollar's real value.
A cheaper dollar makes commodities less expensive for countries with other currencies, boosting demand. Commodity-exporting emerging markets, including South Africa, Colombia and Chile, are witnessing the biggest currency gains this month.
What analysts say
The dollar-debasement trade leaves emerging markets more attractive than developed markets, and commodities more attractive than stocks or bonds, according to Nick Rees, head of macro research at Monex Europe.
"If debasement concerns continue to rise, then that is a constructive environment for commodity currencies more broadly, over and above any rotation away from G10 FX, or the dollar specifically," Rees said.