Dollar recovery spurs emerging markets rethink
A resurgent U.S. dollar has thrust emerging assets into the forefront of a global markets selldown, just months after they were being touted as the least exposed of investments in the credit crunch.
Dollar hovers near record lowEmerging shares, which initially outperformed their developed counterparts in 2008, have tumbled to their lowest in 1-1/2 years with a commodities price slide pummelling investor favourites Brazil and Russia.
A rush to safe-haven U.S. Treasuries and the dollar have hit emerging currencies and bonds, forcing emerging market central banks to draw on their much-lauded reserves to defend their exchange rate regimes.
Seeing these export-oriented economies as more vulnerable to a deepening world economic slowdown, investors have begun to rebalance their portfolios to factor in prolonged dollar strength and a retreat in commodity prices.
A massive unwinding of carry trade positions - built up by investors using the cheaper dollar to buy higher yielding assets in other currencies - has knocked emerging assets lower.
"It's clear we've had hot money leaving. People had been investing in emerging markets in form of carry trades and these people are exiting. As soon as the money leaves in fixed income, some of it leaves from stock markets as well," said Philip Screve, a Brussels-based fund manager with Dexia Asset Manager.
FOREIGN DEBT BURDENS
The dollar's advance - barely halted by Sunday's news of the U.S. government's takeover of troubled mortgage giants Freddie Mac and Fannie Mae - is fanning concern that some economies could buckle under a rising foreign debt burden caused by the weakening of their currencies.
The greenback's 10 percent rise against a basket of currencies since mid-July has already prompted central banks from Russia to South Korea to Indonesia to intervene in foreign exchange markets to support their currencies, stirring memories of the 1997 Asian financial crisis when Asian economies were hit by massive capital flight.
A sovereign default is unlikely as forex reserves in emerging economies such as Russia and South Korea remain ample.
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