(Bloomberg) — The dollar’s relentless rise is threatening to trigger more outflows from Asia’s emerging-market shares, spoiling hopes of the region making a comeback in the second half.
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A gauge of Asian currencies has slumped to its lowest in more than two years, an ominous sign for equities given their strong relationship with moves in foreign exchange. The MSCI Asia ex-Japan Index has fallen 20% as foreign investors took $71 billion out of stock markets in emerging Asia outside China so far this year, already double the outflows in 2021.
The dollar has steamrolled through global currency markets lately, benefiting from bets on aggressive Federal Reserve rate hikes. A stronger greenback bodes ill for Asian stocks when it signals lower risk appetite and is also seen as negative for growth in emerging economies, many of which rely on imports priced in the currency.
“The dollar is strengthening because there’s risk aversion rather than growth” and that’s “not a good mix” for Asian assets, said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management.
Asia’s tech-heavy markets like South Korea and Taiwan look particularly vulnerable as higher global bond yields and recessionary headwinds are hurting valuations and the demand outlook.
Stock benchmarks in the two nations are among the worst performers in the region this year and foreigners have net sold a combined $50 billion of their shares.
For less export-reliant markets, weaker local currencies worsen national balance sheets and company profit margins, as both corporate and sovereign borrowers suffer from higher repayments on dollar-denominated debt.
In India, one of the world’s biggest oil importers, the rupee has tumbled to a record low as the nation faces widening current-account and fiscal deficits. Meanwhile, the hands-off approach by Thailand’s monetary authority has resulted in a slump in the baht, one of the big decliners in EM currencies this year. Further currency weakness could threaten the resilience their stock…