June 17 (Reuters) – An index of emerging market currencies headed for its worst day in over a year on Thursday, slammed by a rising dollar after the U.S. Federal Reserve brought forward its policy tightening timeline.
The Fed said it expects to start tightening in 2023, a year earlier than previously forecast, acknowledging in a way that the inflation could be lasting rather than transitory.
Debt spreads on the EM bond index tightened to 326 basis points – levels last seen in February 2020, while MSCI’s index of EM currencies dropped 0.7%, its biggest daily decline since the pandemic roiled markets in March 2020.
Analysts predicted winners and losers within emerging markets from the Fed policy shift.
“Asian markets are less exposed than other EM regions to Fed policy changes and to U.S. bond yield gyrations,” TD Securities’ strategist Mitul Kotecha said.
Because higher U.S. interest rates tend to dull the appeal of emerging market assets, investors will want to see whether central banks in the developing world will act to preserve their own currencies’ yield premium against the dollar.
Indonesia’s rupiah sank 0.7% earlier in the day as the central bank held rates, while Brazil’s real is likely to enjoy some support after Wednesday’s 75 basis-point interest rate hike.
Eyes are now on Turkey where President Tayyip Erdogan’s demands for lower interest rates, despite 17% inflation, have consistently undermined the lira.
The lira fell to around 8.6 to the dollar as the central bank is seen postponing any cuts to the fourth 2021 quarter, leaving the key interest rate at 19% on Thursday.
Russia’s rouble firmed 0.2% however, steadying after a four-session losing streak before a meeting between Presidents Vladimir Putin and Joe Biden on Wednesday.
The two leaders agreed to begin cybersecurity and arms control talks at a summit that highlighted their discord on those issues, human rights and Ukraine.
On equity markets, MSCI’s emerging stock index slumped 0.6% to a three-week low, though a positive end for Chinese stocks, capped index losses.
For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh
For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX
(Reporting by Susan Mathew in Bengaluru; Editing by Sujata Rao and Shailesh Kuber)