BENGALURU: Most emerging market currencies will continue to struggle against the mighty dollar over the coming year as the United States Federal Reserve (Fed) finally delivers expected aggressive policy tightening, according to a Reuters poll of forex strategists.

       Central banks in emerging market economies have been bracing for this for months by hiking their benchmark interest rates. But the actual moment when the Fed delivers half-point rate increases and rapid balance sheet reduction still matters.

       Minutes from the Fed’s March meeting showed officials had generally agreed to trim the central bank’s balance sheet by US$95bil (RM401bil) a month, providing a major boost to the greenback which was already riding high.The latest Reuters poll of over 50 currency strategists showed nearly all developing market currencies would weaken over the coming 12 months.

       Even currencies which have been dragged higher by the ongoing commodity cycle and their respective central banks’ policy tightening, like the Brazilian real and the South African rand, were forecast to give up about half of those gains in a year.

       These currencies have gained about 18% and 9% respectively so far in 2022.

       The Mexican peso – a classic emerging market foreign exchange (EMFX) hedge – is expected to lose more than three times its gains for this year in 12 months.

       “In the face of imminent sharp Fed hikes and with US yields moving rapidly higher, the resilience of EMFX remains somewhat surprising,” noted Paul Meggyesi, head of forex strategy at JPMorgan.

       “A particular risk to EMFX is that as the Fed starts to deliver rate hikes, further upside in US yields could be primarily driven more by real yields than breakeven inflation.” — Reuters