Impact of Israel-Iranian Tensions: Emerging market currencies fell to fresh lows for the year as the dollar extended gains into a fifth day amid heightened geopolitical tensions and after robust US data fueled bets the Federal Reserve will delay interest rate cuts.
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The MSCI EM Currency Index fell 0.2% on Tuesday to the lowest since December. The US currency got an extra boost in early Tuesday trade after China moved to weaken the daily benchmark for the yuan following continued pressure from the dollar.
Refuge demand for the greenback also increased after Iran’s attack on Israel pushed the conflict between the two countries into a dangerous new phase.
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China Loosens Grip on Yuan by Weakening Fix as Dollar Gains
“The unwanted mix of geopolitics, high for longer rates and volatility in yuan and yen may continue to undermine sentiment in Asian ex-Japanese currencies,” said Christopher Wong, currency strategist at Oversea-Chinese Banking Corp. in Singapore.
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Stronger-than-expected U.S. economic data stymied bets on Fed rate hikes, suggesting the battle against dollar strength won’t be over anytime soon. That has led to an increase in currency intervention across emerging markets, particularly Asia, as the dollar’s strength piles pressure on officials to act.
Meanwhile, any weakening in China’s managed currency can have a big impact, as it is seen as an anchor for its regional peers. Most under threat are the currencies of Asian neighbors such as South Korea and Thailand, where China is the number one trading partner but a suddenly weaker yuan can have a much wider impact.
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The MSCI EM index fell 1.8% this year.
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Published: 16 Apr 2024, 08:36 IST