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Lira Woe and Dollar Ascendancy Tipped to Continue for Some Time

- USD in ascendancy as long as emerging market FX tainted by Turkish Lira crisis

- Lira's woes likely to continue for a time, at least until June rate meeting 

- Inverse Dollar-EM trade likely to propel USD higher in short-term

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© jcomp, Adobe Stock

The US Dollar will continue to rise as long as EM currencies continue to look 'untouchable', says Chris Turner, head of FX at ING Bank. 

Fears at the start of the year that the Dollar would weaken from investor to flight to emerging market (EM) currencies turned out to be unfounded as global data for the first three months of 2018 came out much lower than expected leaving investors wrong-footed and reaching to cover their bearish bets pronto.

"While it seems most fund managers still like the EM growth proposition, few will be tempted to sell out of their high yielding dollar cash and step back into EM until some of the key areas of concern are resolved," says Turner.

One such area is the Turkish Lira, which has been falling like a dead weight since the spring when the government poured fuel on an already overheating economy by announcing more stimulus. Although the central bank has hinted it might step in an raise interest rates the currency lost a hefty 3.0% again yesterday.

Turner says the Lira, in particular, is an area of concern which is 'tainting' the EM space with risk.

"The Lira sold off another 3% in early Asia – seemingly on the back of Japanese investors discovering that the TRY pays 13% for a reason," says the head of FX.

Inertia on the part of the Turkish authorities who are resistant to raising interest rates, to defend the Lira, means the Dollar will probably continue to appreciate in the short-term, at least until the next meeting of the Bank of Turkey on June 7.

"No response has been coming so far and investors fear that Ankara is trying to hold out until the June 7th central bank meeting, if not until after the June 24th elections. With Turkey exposed to FX borrowing and higher energy bills, the fear is that pressure will build further on Turkish corporates, particularly SMEs," says Turner, adding, "Turkey looks set to keep the EM asset class on the back foot and the Dollar in the ascendancy."

US data scheduled for this afternoon is expected to show PMI's and New Home Sales outperforming and could give further impetus to the Dollar, which Turner sees potentially rising to 94.20 (Dollar Index) from its current 93.95 level.

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