SYNERGY FX NEWS 01.08.15

How Strong Is Too Strong? Surging Dollar Hits Emerging Economies A sustained dollar rally is exposing the challenging conditions that lie ahead for the global currency markets.

2015 has provided the USD with a strong recovery for the year to date, and the greenback has continued to make gains against most of the world's top trading currencies. While this may appear to offer a reason for optimism in the short term, reality may deliver a more complex set of outcomes.

Investors and commentators are already casting a cautious eye over the producer nations of Asia and South America, as the ripple effects of the rising dollar continue to be felt in the commodities markets. The rallying global reserve has meant declining revenues for producers of raw materials, and it is little surprise that the emerging economies of Russia, Brazil, and net exporting nations are bearing the brunt of a fall in purchasing power. Five month lows for crude oil have added to this gloomy outlook.

There are fears, too, of consequences for those who find themselves trapped on the wrong side of the currency market. With little sign of the dollar growth's being curtailed at any point in the near future, a loss today runs the risk of developing into a crisis tomorrow. This is as true for state level institutional investors as it is for the day trader, and the motivation for Synergy FX to sound a cautionary note when considering risky plays on the dollar in the months to come.

Concerns in Asia

Voices within Asia have suggested that conditions in the west have been adversely affecting free trade in the east for some time, and that the resurgent dollar has contributed directly to economic challenges on all fronts: from falling exports revenues to collapsing Chinese stock. Now, with several Asian currencies poised at 15 year lows against the greenback - and with fears that a strong dollar may trigger a crisis within one or more of the region's less resilient currencies - the argument is an increasingly convincing one.

The value of the Malaysian ringgit has continued its 2015 trend of discovering near-record lows against the dollar. This month has found MYR/USD positioned at levels which have not been seen since this side of the 2008 banking failure. The slump in the rupiah meanwhile takes the sheen off Indonesia's otherwise robust productivity. There are concerns that the country's healthy export picture may not be sufficient to protect it from contagion, should a currency crisis hit the region.

Whether a healthy dollar is the root cause of Asia's current worries, or is merely a contributor to the turbulence in the markets, the situation as it stands today is likely to trouble any market analyst with a memory for economic history. It was an unexpectedly resurgent dollar which surprised the Asian markets in 1997 and led directly to the run on Thailand's banks. The economic landscape of 2015 is not the same as it was in 1997. The modernisation and integration of the late 1990s means that the global markets of today are more interdependent than they were two decades ago. A wave of panic in the East would not be contained within the Asian markets for very long.