Come September, emerging markets will be watching the Federal Reserve closely with respect to monetary policy or even more specifically, what the central bank decides to do with interest rates. The U.S. dollar has been gaining strength, but its ramifications have been felt globally, particularly with respect to emerging-market assets.
A rising dollar could mean financial instability for emerging market nations trying to pay outstanding U.S. debt obligations with local currencies. Rising interest rates may also discourage foreign investment into emerging market nations in favor of assets based in the U.S.
“The big question for global investors is whether the Fed not only acknowledges the recent market volatility, but also the fact that its own policy signals may be partly behind the deterioration in global risk sentiment,” wrote ING FX strategist Viraj Patel. “Under a Yellen Fed, we were pretty sure that these market conditions would have kept the US central bank in wait-and-see mode; however, all eyes will be on new Fed Chair Powell to see whether he formally adopts an ‘America First’ monetary policy approach.”