By Sebastian Tong
LONDON, March 20 (Reuters) - The dollar's precipitous slide this week could mark a reversal of fortune for emerging markets in the global financial crisis, by reviving investor appetite for risk and easing the foreign debt burden in some countries.
Initially seen as the least exposed of investments in the credit crunch, emerging markets were hit by a global sell-off in the second half of last year when the dollar rose in tandem with a commodity prices collapse.
But the dollar's retreat this week, triggered by the Federal Reserve's surprise move to mount a large-scale purchase of US government debt, and the consequent commodities recovery could boost emerging markets, pummelled last year by investors fleeing for the relative safety of the dollar and US Treasuries.
"The Fed has not taken care of all the problems and made the world a happy place again but the impact of this plan can only be positive for all risk assets. There's no question that this alleviates the pressure on emerging markets," said Kasper Bartholdy, managing director emerging markets at Credit Suisse.
The dollar is set for its biggest weekly percentage drop against the basket of currencies in almost a quarter of a century after the Fed's plans to buy $300 billion of long-dated Treasuries over the next six months in an effective printing of money raised the spectre of an oversupply in dollars.
Emerging shares are up some 2 percent since the mid-week Fed announcement while emerging sovereign debt spreads have come in some 20 basis points from a week ago, stabilising at around 630 basis points over Treasuries.
A continued reversal of the greenback's broader appreciation since August could give emerging assets a further fillip.
Though down over 55 percent from May, emerging equities have proved resilient compared to their global peers.
Despite lingering worries over the impact of the global demand contraction on export-oriented emerging economies, emerging shares have lost a mere 2 percent in the year to date, outperforming an average 12 percent loss suffered by shares in both global and developed markets.
"These are still early days but I would never wait for economic indicators...The market is simply starting to anticipate economic recovery," said Philip Screve, a Brussels-based equities fund manager for Dexia Asset Management.
COMMODITIES, CURRENCIES
The dollar's weakness will offer some respite to corporate and sovereign borrowers in emerging economies facing a wall of foreign debt refinancing this year.
Investor fears over emerging-markets exchange rate instability focused on Russia, which in spite of its massive reserves, was seen as vulnerable to the roughly $130 billion in maturing foreign debt this year faced by its corporate sector after its rouble lost more than a third of its value against the dollar from its mid-2009 peak.
Like commodity-exporting peers such as Brazil and Indonesia, oil-focused Russia could also be boost by another side effect of a weaker greenback.
"Dollar weakness tends to be associated with strengthing commodity prices. Of course whether this helps, depends on overall demand," said Credit Suisse's Bartholdy.
Oil has risen above $50 per barrel for the first time in 2009, peeking above $52.
But the dollar's retreat is seen to benefit markets in Latin America and Asia more than emerging Europe -- convulsed in recent months by fears over its ability to service its hard currency debt in the face of weakening currencies.
The global credit crunch has caused "collateral damage" in Asia and Latin America, hitting their export industries and capital flows but leaving their banking system essentially unharmed, said Ashmore Investment Management research head Jerome Booth.
"The fall in exports and investment flows are short-term, transitional problems. You're not looking at systemic banking problems," Booth said, adding that high foreign-currency reserves built up in Asian and Latin American countries would help them cope.
Emerging Europe, in contrast, face further capital flight as foreign banks reduce credit lines. A weaker greenback will do little to help countries such as Hungary and Poland that have substantial foreign debt denominated in euros and Swiss francs.
"If you want to bet on the turn in the cycle, then Asia is your play. Latin American economies should also benefit on the margin but emerging Europe faces massive deleveraging," said Pierre-Yves Bareau, chief investment officer emerging markets at Fortis Investments.
(Reporting by Sebastian Tong; Editing by Victoria Main)