Strong Dollar Keeps EM Currencies Under Pressure, Lira Suffers Most

Strong US retail sales data pushed the Dollar higher to a 16-month high earlier in the week. As a result, emerging market currencies fell, including the Turkish Lira, which hit historic lows.

Dollar firm after data

US retail sales rose 1.7% month-on-month in October, above economists’ expectations. October data showed that buyers are tolerating higher inflation but wondering how long the Federal Reserve will be able to keep interest rates at record lows.

Higher rates are considered to be favorable for the Dollar, making it more attractive than other currencies. Judging by the numbers recorded on Tuesday, traders are betting that strong consumer demand could exacerbate inflationary pressures, causing the US central bank to raise rates earlier than expected.

This view is reinforced by comments from James Bullard, President of the St. Louis Fed, who told Bloomberg that «a hawkish stance could do well in the coming year.»

Since Wednesday, the Dollar has gained further when the Bureau of Labor Statistics reported consumer prices rose at the fastest pace in thirty years. Earlier, retailer Walmart also raised its full-year sales and profit forecasts and reported quarterly results that beat analysts’ expectations.

Strong Dollar weighing on EM currencies

The Dollar Index, which measures the US Dollar against a basket of six competing currencies, rose 0.5% on Tuesday, dropping most other currencies worldwide. Some of the most notable changes have occurred in emerging markets, including the Turkish Lira, South African Rand, and Mexican Peso.

The South African Rand fell to its lowest level since March. The Mexican Peso has hit its lowest level since early November but could dip lower if rate speculation intensifies.

Turkish Lira suffering the most

The Turkish currency fell to a record low of 10.44 lira per dollar early on Thursday (Nov 18) and then to 10.31, shedding 2.4%. The dollar’s appreciation is just the latest challenge for the Lira, which has fallen 28% this year, the worst among emerging market currencies. It has mostly fallen since September, when Turkey’s central bank unexpectedly cut rates for the first time under pressure from President Recep Tayyip Erdogan, followed by another cut. Another cut may occur this week.

The country has a current account deficit of the balance of payments, low gold reserves, and huge inflation of 20%, which, with devaluation, are already feeding each other. Option traders now see a more than 50% chance that the currency will drop to $11 per dollar by the end of the year. Volatility for the USDTRY pair is at its highest since April.

But a 20% decline in the Lira since early September is unlikely to prevent the central bank from weakening monetary policy again tomorrow.  President Erdogan pledged to continue fighting high interest rates, sending a clear message to investors a day before the central bank’s decision.