Emerging Currencies Extend Losses as Bond Market Stress Builds

Emerging-market assets, encompassing both currencies and stocks, saw a downturn as a significant week for global markets began. This decline was primarily driven by escalating oil prices and anxieties surrounding the pace of artificial intelligence development. These factors collectively weighed on market sentiment ahead of an anticipated interest rate hike by the Federal Reserve, which would be its first since 2023.

The MSCI Inc. index of developing-nation currencies fell by 0.2% as of 12:15 p.m. in New York on Monday. Among the hardest hit were the Chilean peso and the Hungarian forint, with the former experiencing a more than 1% slump against the dollar. The selloff, however, eased somewhat as Brent crude pared some of its earlier gains and 10-year US Treasury yields retreated after briefly touching 5% for the first time since 2023.

Developing-nation equities also extended their losses for a third consecutive session, marking the longest streak of declines in nearly two months. South Korea's Kospi index notably slid by over 3% following calls from major AI firms for a slowdown in technological development. This development raised concerns about a sector that has been a significant growth driver for the market this year.

Analysts, such as Phoenix Kalen, global head of emerging-markets research at Societe Generale, anticipate continued mild weakness for emerging market currencies due to their sensitivity to global risk sentiment and higher oil prices. However, Kalen also noted that investors have become more discerning in recent years, differentiating between currencies based on their vulnerability to global shocks. Traders are closely monitoring a series of central bank decisions this week, including from the Fed, Bank of England, and Bank of Japan, for insights into future interest rate policies amid renewed inflation risks from elevated oil prices. US core inflation came in hotter than expected last week, leading markets to almost fully price in a 25-basis-point increase in borrowing costs by the Federal Reserve.