The value of the U.S. dollar has marched higher following the Federal Reserve’s latest lift in interest rates, posing a continued threat to certain emerging market currencies.

The rise in the USD has created challenging conditions for many EM countries, including increased debt servicing costs as their local currencies slide, as well as higher commodities prices, and more expensive U.S. exports. 

The Fed’s ongoing tightening of monetary policy has generally exacerbated conditions, with its latest rate hike preceding key central bank rate decisions in the Asia-Pacific region in the week ahead, including from the Reserve Bank of India (RBI) and the Reserve Bank of Australia (RBA).

The Fed’s Open Market Committee elected Wednesday to raise the target range for the federal funds rate to 2.0-2.25%, on the back of positive momentum in the domestic labor market and inflation near the central bank’s 2% objective.

Also, the third reading of second-quarter GDP came in as expected at 4.2% Thursday, reinforcing optimism about U.S. economic expansion, while month- and quarter-end positioning, as well as Italian economic policy concerns further contributed to the USD’s rally before cooling down.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, observed ahead of the weekend that the USD’s post-Fed gains had been extended, though the upside momentum appeared to be stalling.

The U.S. dollar index (DXY) was quoted up around 0.3% intraday Friday to more than US$95.25.

EM impacts

However, the appreciation of the USD, coupled with FOMC monetary policy tightening, as well as a significant shift in U.S.-led global trade policies, have recently contributed to a plunge in certain EM currencies, including the Argentine peso, Turkish lira and South African rand, among others.

Amid this activity, equity investors have been generally exiting EM funds, while credit spreads in these countries have been widening.