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Interest rate differentials will continue to favor USD vs EM currencies

FXStreet (Córdoba) - According to analysts from Brown Brothers Harriman, the decision of the Federal Reserve to keep rates unchanged is not a game changer for the US dollar, that could continue to be favored versus emerging market (EM) currencies amid rate differentials.

Key quotes:

“Despite the continued uncertainty about the start of the Fed tightening cycle, we don’t believe that much has changed regarding the broader performance of the dollar (and therefore EM). Interest rate differentials will continue to move in favor of the US, keeping the pressure on EM currencies. That said, the positive start of the week for some equity markets plus the near 3% increase in oil prices may help EM assets to stabilize a bit. However, the asset class remains vulnerable to the same global risks as before.”

“Furthermore, we continue to look for idiosyncratic risks coming from Brazil and Turkey which remain tilted to the downside. China has likely become a greater source of negative risk ahead, though we think those risks remain manageable.”

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