FX round-up: EM currencies find respite from US dollar ahead of Memorial Day

Sterling was slightly lower at the end of the week as the US dollar strengthened after President Donald Trump ramped-up his rhetoric against the EU's trade policies.

As of 1538 BST, cable was dipping 0.14% to 1.29905, alongside a 0.23% drop in euro/dollar to 1.16439 following a lower-than-expected reading on Eurozone inflation.

In an interview with Bloomberg, Trump again threatened to leave the World Trade Organisation and criticised Europe, which he said was almost as bad as China (only smaller).

Trump also told Bloomberg he had rejected an offer from the EU to eliminate tariffs on cars if the US did the same, explaining that "It's not good enough. [...] Their habits, their consumer habits are to buy their cars, not to buy our cars."

He also complained that a "wall" had been erected against US agricultural exports.

Against that backdrop, as of 1538 BST the US dollar spot index was edging higher by 0.13% to 94.85, although against many - when not most - emerging market currencies it was trading slightly lower.

Nevertheless, that was only after the previous session's rout in the Argentine peso and weakness in the Turkish lira due to still simmering concerns around the country's lack of an effective policy response to its currency crisis.

Indeed, recent pressure on countries sporting large current account deficits meant Indonesia's central bank had been forced on Friday to announce it was intervening in foreign exchange markets and Turkey to raise the withholding tax on US dollar deposits.

The former measure was keeping US dollar gains capped at 0.20% to 14,710.0 rupiah, while against the Turkish lira the Greenback was trading lower by 0.63% at 6.6126.

Versus Argentina's peso meanwhile, the US dollar was down by 0.71% to 38.2609.

To take note of, commenting on the outlook for the lira, Holger Schmieding and Kallum Pickering at Berenberg estimated that Turkish consumer prices would need to accelerate by 48% from their July level to offset the weaker currency.

They conceded that for a country with a current account deficit worth 6.5% of gross domestic product and facing a sudden stop in capital inflows, a real devaluation was a part of the solution.

Nevertheless, they added that: "How Turkey's central bank plans to regain market confidence that it will eventually hit its 5% inflation target again remains a mystery.

"Only a credible U-turn in Turkish policies – raising interest rates, submitting to an IMF programme and mending relations with the US and the EU – can support the exchange rate and dampen the surge in inflation ahead. President Recep Tayyip Erdogan does not seem to be close to that yet.

"[...] Argentina is in trouble but is adjusting its policies. Despite an initial risk-off reaction among investors, we do not expect a wave of emerging market crises that could seriously dent growth in the developed world."