'Investment Black Hole' US Shakes Global Exchange Rates and Interest Rates

Emergency in Major Countries like Canada and France

US Stocks and Bonds Absorb Capital

Increased Volatility Due to Political Instability in Various Countries

Brazil and Canada See Sharp Rise in Dollar Exchange Rate

'Safe Asset' French Bonds See Interest Rates Soar

"High Investment Risk in Emerging Markets, Caution Advised"

Countries around the world, including Brazil, Canada, and Mexico, are on high alert for managing market interest rates and exchange rates. As US stocks and bonds, dollar-denominated assets, are absorbing foreign capital like a black hole, there have been successive cases of national bond interest rates and exchange rates soaring due to events such as fiscal deterioration, political instability, and trade adversities. With the rapid increase in exchange rate risks for investors, even central banks in various countries are stepping in.

French Interest Rates Rise to Greek Levels

According to foreign media on the 17th (local time), the Brazilian real exchange rate rose to 6.21 reals per dollar during the day (a decline in the real's value), marking a record high. The Central Bank of Brazil (BCB) intervened urgently to bring the exchange rate down to the 6.10 real range, but the exchange rate against the dollar is still about 26% higher than at the beginning of the year. According to an analysis by the Financial Times (FT), the BCB poured about $6 billion into the foreign exchange market just this week.

The sharp decline in the value of the Brazilian real is due to investors withdrawing funds and moving them to the US, amid concerns over the expansionary fiscal policy of leftist President Luiz Inácio Lula da Silva. Brazil's fiscal deficit amounts to 10% of its annual Gross Domestic Product (GDP). Paul McNamara, director at GAM Investments, pointed out, "The Brazilian government is paying very high interest on its borrowings, approaching an unsustainable level."

The exchange rate of the Canadian dollar against the US dollar also soared to 1.43 Canadian dollars per dollar on this day, the highest level since March 2020 when the global financial market shock occurred due to the COVID-19 pandemic. This was due to the sudden resignation of Deputy Prime Minister and Finance Minister Chrystia Freeland, who refused to expand fiscal spending led by Prime Minister Justin Trudeau. In France, a key currency country, the coalition government led by Prime Minister Michel Barnier collapsed after conflicts over next year's budget plan, causing national bond interest rates to soar. On this day, the interest rate on France's 10-year government bonds was 3.04% per annum, fluctuating at a level similar to the 3.10% per annum interest rate on Greece's 10-year government bonds during the financial crisis over a decade ago.

Brazilian Bonds Become More Risky

The instability in exchange rates and interest rates is attributed to the rapid absorption of global investment funds by the US asset market, increasing volatility. After President-elect Trump won the election last November and announced aggressive protectionist policies, anxiety spread further. JP Morgan's emerging market currency index has fallen more than 5% over the past two and a half months.

There is an analysis that the risk of investment products in emerging markets has increased significantly. The decline in Brazil's Bovespa Index this year is only 6% in real terms, but it amounts to 27% when converted to dollars. Brazilian government bonds also saw their yields (10-year maturity) surge from the 10% range at the beginning of the year to the 14% range this month (bond prices fell), and the exchange loss is significant.

The FT analyzed, "Except for countries like Argentina and Turkey, where exchange rates have plummeted for years, investors in emerging market bonds have mostly suffered losses due to exchange rates, even if they received double-digit interest rates." According to Morgan Stanley, $14 billion (about 20 trillion won) has been withdrawn from emerging market bond investment products this year.

Frank Gill, an economist for the Middle East and Africa at credit rating agency S&P, pointed out in a report, "Many emerging countries are being shunned in the dollar-denominated bond market, increasing the likelihood of government defaults."

Reporter Hyunil Lee hiuneal@hankyung.com