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Funds Are Furiously Selling Risky Emerging Market Currencies

Emerging-market currencies are tumbling as the twin threats of rising US interest rates and a global recession send traders scurrying to the safety of the dollar.
Funds Are Furiously Selling Risky Emerging Market Currencies A man counts Philippine Peso bills inside a store in Manila, Philippines. Photographer: Hannah Reyes Morales/Bloomberg
Bloomberg
By Bloomberg
6 Jul 2022
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The MSCI Emerging Markets Currency Index dropped for a second day on Wednesday, extending this year’s slide to 4.5%, the biggest for such period ever. Losses in the developing world were led by the Russian ruble, which fell for a fourth day amid talks about foreign-exchange intervention. Andean currencies also weakened, with the Colombian peso dropping to a fresh record against the dollar. The Philippine peso led declines in Asian trade, sliding to the lowest level in 17 years, while the South Korean won tumbled to the weakest since 2009.“Emerging markets will suffer in the current environment of either higher developed-market rates or weaker global growth,” Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a research note. “No matter how things turn out, it’s bad for EM.”

Emerging Market Bears | Developing nation currencies have slumped over the past six months

Read More: Every Emerging Currency Slumps Amid a Stronger Dollar

All of the 23 major emerging-market currencies tracked by Bloomberg have weakened over the past month as the Federal Reserve has raised its benchmark rate by a combined 125 basis points at its latest two meetings. Chair Jerome Powell has said the central bank may hike by either 50 basis points or 75 basis points at its July gathering.

Heightened Uncertainty

Asian currencies remain vulnerable even if regional central banks were to step up the pace of tightening, unless they are willing to contemplate positive real interest rates, Wee Khoon Chong, senior market strategist at Bank of New York Mellon in Hong Kong, wrote in a research note Wednesday.

Deteriorating consumer sentiment and rising interest rates have increased the odds of a US recession in the next year to 38%, according to the latest forecasts from Bloomberg Economics.

“The environment is not very forgiving for EMs,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. “An improvement in the global-growth outlook will be required to turn the sentiment on the dollar, which may only come next year.”

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