Post-FOMC relief proves short-lived

The rally in EM currencies following the conclusion of yesterday’s FOMC meeting has proved to be short-lived, with markets seemingly focussing on the fact that the Fed has paved the way for a June rate hike as opposed to the downward revision to its forecasts for end-15 and end-16 US rates, which initially grabbed the headlines. This is likely to intensify concerns that Fed tightening and a strong dollar could trigger widespread problems in the emerging world but in our view these are overdone. In much of Asia, currencies have held up reasonably well over the past month and the main concern for policymakers is faltering growth and weak (or negative) inflation. Interest rates will remain low even as the Fed tightens. In contrast, currencies in Latin America have generally suffered much larger falls against the dollar recently. Dollar debt burdens are much lower than in the past, meaning there is less pressure for central banks to tighten in response to weaker currencies, but even so the scale of the recent sell-off could start to spook policymakers that have become worried about the speed of currency declines.