Rate freeze expected to weaken US dollar but benefit emerging markets

The Fed’s dovish policy stance to leave interest rates unchanged will undoubtedly have important implications for emerging markets and the strength of the US dollar

The US Federal Reserve Board’s (Fed) announcement that it will keep interest rates on hold and not raise interest rates in 2019 - seen as a commitment to a so-called “dovish” monetary stance - is widely expected to weaken the US dollar and benefit emerging markets.  A dovish monetary policy tends to favour economic growth by keeping interest rates low.

In their December forecast, the Fed stated that it was still expecting to announce two more interest rate hikes in 2019 to 2020. But following its March 20 meeting, the Federal Open Market Committee, the Fed’s policymaking body, announced that these rate hikes would no longer happen.

With the Fed's announcement, the US dollar is expected to weaken over the coming months. Asian currencies are expected to benefit from a weaker US dollar translating into increased investments and economic productivity of the Asian markets in 2019.

“Fundamentally, the US dollar is quite expensive. The Fed adopting a more dovish monetary policy will benefit Asian and emerging market currencies simply because of the current environment. I feel that the room for the US dollar to get stronger from here is very limited,” says Tai Hui, chief strategist for Asia of J.P. Morgan Asset Management.

The US dollar weakened against Asian currencies following the March 21 announcement, as investors digested the Fed’s decision to keep the benchmark federal funds rate unchanged at 2.25-2.5%.

“The Fed’s concerns over the future inflation path are clearly stronger than anticipated and it seems that the rate hike cycle is now over. This is likely to add further fuel to an equity market that has already enjoyed a strong start to 2019. While we expect the dollar to suffer, the EM carry trade – a favourite in the FX market in 2019 – is now likely to receive a further boost,” says Lee Ferridge, head of multi-asset strategy. the Americas at State Street Global Markets.

This was echoed by Christian Nolting, chief investment officer of Deutsche Bank Wealth Management, who says: “The US central bank sees little need to lift rates or continue down the path to normalization, and could take a more retrospective stance by monitoring economic data for signs of rising inflation before jumping back to normalizing policy rates,” he says.

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