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Informist, Monday, Mar. 17, 2025

 

By Pratiksha and Pratigya Vajpayee

 

NEW DELHI/MUMBAI – As much as one would want to look for bright spots in the rather dismal emerging market currency space, Chris Turner, global head of markets research at ING Bank, believes that none of these currencies are well-placed to be able to withstand the headwinds from escalating trade conflicts between the US and other countries. While the Indian rupee is just as vulnerable as its peers, the Brazilian real and the Turkish lira are seen relatively better off, he said.

 

"I think there has been some interest in Brazil. And the most popular carry trade in the world is the Turkish lira, where you have a central bank heavily controlled, delivering very modest annual devaluation," Turner told Informist in an interview. "So I suppose those two currencies--Brazil and Turkey --will survive (the US tariffs)."

 

Since returning to the White House late January, US President Donald Trump has slapped tariffs on multiple countries, including Mexico, Canada and China. He has also vowed to impose reciprocal tariffs from Apr. 2 on several trading partners, including India. Ever since President Trump took over, the dollar index, which measures the strength of the greenback against a basket of currencies, has climbed 0.3%. The dollar index rose to an over two-year high of 110.18 on Jan. 13, before coming off sharply.

 

Apart from the emerging market pack, Turner expects the euro to be the most exposed to risk from Trump's tariffs. "I would say the euro is at risk. We'll probably see tariffs on at least the auto sector, if not the European Union as a bloc," he said. Turner sees all commodity-linked currencies, such as the Canadian dollar, as vulnerable to US tariffs. 

 

Turner said China may opt for a weaker renminbi this year and let the currency succumb to the pressure of a strong dollar. He expects the Chinese currency to hold at around 7.30-7.40 a dollar, flagging that the authorities may not want to devalue the yuan a lot as a devalued currency attracts more tariffs. On Mar. 4, Trump told the leaders of Japan and China that they could not continue reducing the value of their currencies, adding that doing so is unfair to the US.

 

"The second thing is the bigger picture which relates to the internationalisation of the renminbi and like a long view that they want to be treated as a reserve currency. I think they want to avoid the accusation of being seen as perhaps a sort of less credible emerging market currency that would devalue at the first sign of pressure," he said. The onshore Chinese yuan has depreciated 0.7% against the dollar since February.

 

Turner also spoke about the perceptible change in India's exchange rate environment after Reserve Bank of India Governor Sanjay Malhotra took charge in December, compared to a previously "heavily managed" regime under Shaktikanta Das. He expects the Indian currency to move in line with its emerging market peers, tracking the impact of US tariffs.

 

"I think that change in (RBI) regime from the managed regime to closer to a float has probably shaken some more money out of the carry trade (in rupee). I would have thought that now dollar/rupee is more kind of freely floating. It's just going to be driven, maybe consistent with the emerging market block, depending on whether tariffs come in," he said.

 

ING Bank sees the rupee at 88 a dollar at the end of 2025 and at 89 by 2026-end. So far this year, the rupee has depreciated 1.4% against the dollar, hitting a lifetime low of 87.95 a dollar on Feb. 10, primarily owing to foreign portfolio outflows and a strengthening US dollar.

 

However, Turner expects the dollar index to rise only as high as 110-112 from its current level of 103.70 even after the broad reciprocal tariffs announced for April, given the substantial gains already notched up by the greenback since the US elections. "US reciprocal tariffs should be strong for the dollar, but the dollar has already rallied 10%. So I think we suspect that dollar can go back to the highs, perhaps a little bit higher, but I think 115 in the dollar index would be a stretch," he said.

 

On the possibility of US economy weakening due to the impact and uncertainty of tariffs, Turner said that although recent data has pointed towards slowing of economic growth, one needs to see prints of some more months to have more confidence on that view. ING Bank expects the US Federal Open Market Committee to cut rates only twice this year, in September and in December. After cutting rates by 100 basis points last year, the US FOMC applied brakes on its rate-cut cycle and opted to leave the federal funds target range unchanged at its January meeting.

 

"I think unless we see that consumption holds up okay, the Fed can probably be quite comfortable and cut rates perhaps in September when they've got a bit more confidence that inflation is a bit more under control at 2%," he said.

 

Despite the macroeconomic uncertainty posed by tariffs, central banks across the globe are not behind the curve when it comes to cutting rates, Turner said, pointing out that the current upward sloping yield curves also suggest the same. He gave the example of the European Central Bank, which is in the middle of an aggressive easing cycle. The ECB has cut interest rates six times since last June amid slowing inflation. Turner expects the ECB to slash rates to as low as 1.75% by the end of this year from the current 2.50%.

 

On the other side, ING Bank expects two more rate hikes by the Bank of Japan in May and in October and sees the yen rising to as high as 145 against the dollar on account of that. "To be honest, I've been a bit surprised by the yen strength at the moment. It seems like the yen is really hypersensitive to any small adjustment in Japan government bond yields or any sort of perceived hawkish rhetoric from the Bank of Japan," Turner said. "Right now, we think probably 4.25% is near the floor for US Treasury yields and the yen is more likely to head back up to 152-153 (a dollar) and then drop down to 145."  End

 

US$1 = INR 86.82

 

Edited by Tanima Banerjee

 

 

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