Emerging market currencies dipped on Thursday, while oil prices and the U.S. dollar climbed, driven by heightened geopolitical risks stemming from renewed conflict in the Middle East. The U.S. launched fresh strikes on Iran, causing Brent crude to rise for a fourth consecutive day to over $85 a barrel, nearing a one-month high. This escalation in the Middle East intensified concerns over potential disruptions to global energy supplies and raised fears of inflation, prompting central banks worldwide to consider interest rate hikes.
Adding to the market jitters, the Bank of Korea (BOK) unexpectedly raised its benchmark interest rate by a quarter percentage point to 2.75%. This marked the first rate hike in South Korea since 2023, aimed at curbing inflationary pressures exacerbated by the escalating Iran war. The decision by the BOK contributed to a significant sell-off in South Korean equities, particularly semiconductor stocks, with the Kospi index plummeting by 6.37% to 6,820.60. Institutional and foreign investors collectively sold off 3.75 trillion won ($2.56 billion) worth of shares.
The prospect of higher U.S. interest rates, fueled by the rising oil prices and inflation concerns, also strengthened the dollar, further pressuring emerging market currencies. Although softer-than-expected U.S. inflation data earlier in the week had eased immediate concerns about Federal Reserve rate hikes, the current oil price surge is now seen as a major factor influencing future monetary policy. David Russell, an analyst at TradeStation, noted that while there is no immediate pressure on the Fed, oil prices are a long-term driver.
