Dollar Bomb in Emerging Economies and Argentina’s Currency Crisis

The term ‘collateral damage’ may not seem significant when discussing wars, but it certainly isn’t trivial, especially regarding the impact of global conflicts on emerging markets. Most currencies of emerging markets are expected to weaken, according to analysts at Societe Generale, who warned that China’s yuan will moderately depreciate while South Africa’s rand and Latin American currencies might remain weak. Meanwhile, Goldman Sachs analysts stated that dollar strengthening would likely support exchange rates in other developed countries rather than emerging economies. The ‘doomsday ball’ continues rolling in the Emerging Markets (EM-FX) index, including Argentina, though it may slow down, noted analysts led by Phoenix Kalen at Societe Generale in London. While the MSCI Emerging Markets Currency Index closed at a five-month high last week, investor sentiment remains bearish due to trade war concerns. Colombia’s peso and Indonesia’s rupiah were among the worst-performing currencies in Europe last week, Bloomberg reported. Even if the worst scenario doesn’t materialize, current uncertainty is already causing harm, said Tamas Cser managing approximately $2.8 billion at Hold Alapkezelo in Budapest. Political unrest this year in Turkey, Indonesia, and South Korea has increased investor risk aversion. Morgan Stanley revised its forecasts for Turkey this week, indicating a weaker lira by year-end and advising against carry trades. The U.S. tariff dispute may have cost Turkey another $10 billion in foreign reserves, adding to losses incurred last month amid domestic political crisis. Some investors used the sell-off as an opportunity. Cser from Hold Alapkezelo bought more Polish stocks betting Trump policies will lead to higher European defense spending. Malin Rosengren from RBC BlueBay predicted Trump strategies will encourage other leaders to adopt radical tactics, increasing market volatility risks. In Argentina, there’s anxiety about potential dollar appreciation following relaxed currency controls. For the first time in years, individuals can now buy unlimited U.S. dollars. On April 14, U.S. Treasury Secretary Scott Besset visited Buenos Aires as the IMF approved new loans totaling around $21 billion for Argentina this year. Economy Minister Santiago Caputo announced the easing of strict exchange controls—a significant step towards free currency trading. However, a dollar rally would be politically disastrous for the government—and the IMF. Large-scale peso-dollar exchanges could signify distrust in President Milei’s administration, accelerating his declining popularity since early this year. Exchange controls are being relaxed gradually; previously, purchases were limited to $200 monthly. Companies can transfer shares abroad for the first time since 2025, but they still cannot officially acquire dollars freely. IMF chief Kristalina Georgieva justified the loan citing Milei’s reforms stabilizing the economy. The new loan ensures Argentina pays its debts, including $41 billion owed over the next few years. Despite declining public support, no Argentine president has implemented IMF budget balance requirements as radically as Milei, who reduced state spending by 5% shortly after taking office in December 2023. With inflation back above 3% in March for the first time in five months, Milei faces challenges ahead.