Emerging market currency sell-off accelerates

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The emerging market currency sell-off has accelerated throughout trading in Asia on Friday, including the Indonesian Rupiah sinking to levels that prompted the Bank Indonesia (BI) to intervene and stabilise the market.

While the Indonesian Rupiah has so far led the headlines after a plunge in currency value, the Malaysian Ringgit has also suffered from an extreme round of weakness and the offshore Chinese Yuan looks set to continue its course of hitting further historic lows against the Dollar.

While the declines seen in Asian currencies are being linked to the impact of trade throughout the continent if Donald Trump enforces protectionist trade policies, the return of expectations that the Federal Reserve will still raise US interest rates in December is strengthening the Dollar and also pressuring the emerging market currencies.

If the Federal Reserve do not raise US interest rates in December as they have been preparing the markets towards for months following such a spectacular rebound in stocks after the victory by Trump, it will raise questions over credibility and concerns that they are worried about Donald Trump taking over office in January.

There is also a prolonged threat to emerging market currencies that once Donald Trump completes his inauguration early next year that he will publicly encourage higher US interest rates during the course of his presidential term. While the Federal Reserve is independent to any political party or government, the expectations that Trump will encourage faster monetary policy normalisation is a real threat to the emerging markets.

Overall the combination between the initial response that fiscal stimulus encouraged by Trump should provide a boost to the US economy and also encourage increased interest rates in the United States should in theory result in projections that the Dollar Index could break the psychological level at 100.

Jameel Ahmad, vice president of Market Research at FXTM