How US dollar influences emerging market currencies, like the rand – Wall Street Journal

The rand's value is influenced by many factors, from domestic policy decisions to currents in the global economy. This week, the rand has strengthened on news that traders have an improved appetite for risk and therefore have been buying emerging market currencies. Also playing into rand strength this week is a weakening dollar, with worries in the US that the economy is set for more pain with an expected rise in Covid-19 cases after July 4 Independence Day celebrations. Helping to make sense of how the dollar can hurt emerging market currencies is the Wall Street Journal, which sets out why a stable dollar is generally good for many developing countries. – Editor.How a volatile dollar hurts emerging markets.By Simon Constable.Most investors know that the U.S. dollar is the most important currency in the world. But fewer understand how changes in its value can have an outsize impact on investments in emerging markets..___STEADY_PAYWALL___.Among those who should take note are investors who may be attracted to the valuations of emerging-markets stocks, which took a beating when the dollar rallied in March but may benefit if a more-recent pullback continues..An emerging market typically refers to an economy that is becoming more engaged with global markets but isn't as developed as those of richer nations such as the U.S. The U.S. Vanguard FTSE Emerging Markets Index ETF (VWO) tracks a broad basket of stocks from a range of emerging-markets countries, including Brazil, Russia and South Africa.A stable dollar usually benefits all economies, whether emerging or developed, by allowing businesses to plan more easily.The U.S. currency has been anything but stable recently.The dollar index, which measures the strength of the U.S. currency against other major currencies such as the euro and the pound, rallied to 102.8 on March 20, its highest level in more than three years. It has fallen back to 97.3 since then, and some observers believe a federal stimulus package designed to help the U.S. weather the Covid-19 crisis could ultimately weaken the dollar further.How does a strong dollar affect emerging-markets economies?At the beginning of the Covid-19 crisis, investors gripped by panic rushed for the relative safety of U.S. government bonds. They needed U.S. dollars to buy them, which led to a dollar rally. That resulted in a wave of economic pain in emerging markets, at least initially, as capital flowed out and debt became more expensive to service."In mid-March during the crisis, the flow of capital was pulled from weaker-currency countries toward the U.S.," says David Ranson, director of research at financial-analytics firm HCWE & Co. "This helps the U.S. make it through the crisis, and it hurts the weaker countries."In addition, emerging-markets countries often borrow dollars to finance their economic growth. That works well when the dollar is stable, but when it rallies (and the local currency falls in value) the interest on the dollar-denominated debt becomes more expensive to service. In extreme cases, a dollar surge can plunge a country into a financial crisis if the majority of its loans are denominated in U.S. dollars, and the value of the local currency falls significantly.It works vice versa, too. "When the dollar weakens, it helps their repayment capabilities," says Anupam Damani, a portfolio manager at Nuveen in New York. In such cases, emerging-markets economies can perform well.The dollar's impact on commodities prices is another factor to watch.Almost all commodities, including oil and natural gas, gold, industrial metals and agricultural goods, are usually priced in U.S. dollars. So when the U.S. dollar rises, commodity prices tend to fall (and vice versa)."They don't fall in any real sense, but they do in terms of dollars," Mr. Ranson says. That matters for emerging markets, many of which rely heavily on commodity exports to drive their economies. Russia, for example, is a major exporter of oil. Brazil exports oil, iron-ore and agricultural products, and Ghana exports cocoa, gold and oil.The commodities that tend to be most sensitive to dollar movements are oil, precious metals and industrial metals. Prices of agricultural products, while also denominated in dollars, are often more affected by the weather.Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.

How US dollar influences emerging market currencies, like the rand – Wall Street Journal

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