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15 May 2013
Forex Flash: Despite USD hitting highs, it has struggled against EM - BBH
FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that in the EM space, the dollar has been largely unable to make new highs against most of the EM currencies.
They note that there are a few exceptions, but for the most part, EM FX has held up relatively better than the majors during this broad-based dollar rally. They think this can persist and their work shows that in past instances, the dollar can at time have a two-speed rally whereby the correlations between the majors and EM FX break down. They write, “Obviously, during times of risk on/risk off, the correlations move broadly towards 1. But in period such as the one we are seeing now where risk on/risk off has retreated, we would expect to see more differentiation amongst currencies based on fundamentals.”
They note that there are a few exceptions, but for the most part, EM FX has held up relatively better than the majors during this broad-based dollar rally. They think this can persist and their work shows that in past instances, the dollar can at time have a two-speed rally whereby the correlations between the majors and EM FX break down. They write, “Obviously, during times of risk on/risk off, the correlations move broadly towards 1. But in period such as the one we are seeing now where risk on/risk off has retreated, we would expect to see more differentiation amongst currencies based on fundamentals.”