(Bloomberg) -- Developing-nation currencies, stocks fell for a fifth day, deepening losses amid broad risk-off sentiment as the US dollar advanced as traders reassess how deeply the Federal Reserve will cut interest rates.
A gauge for developing FX closed 0.1% lower Thursday. The index, which is headed for its worst week since August 2023, briefly erased gains for the year earlier. The MSCI benchmark for emerging stocks is on track for a 4.5% loss this week.
Fed Chair Jerome Powell said Thursday afternoon that the Fed doesn’t need to be in a hurry to cut rates given the recent performance of the US economy.
Risk assets have slumped since Donald Trump’s election in the US as traders calibrate for a stronger dollar and potentially higher global interest rates. Powell’s remarks — on the back of jobs and producer price data that signaled healthy demand for workers and stubborn underlying inflation — added even more pressure.
While the Fed is seen cutting interest rates again next month, it may need to keep a more restrictive stance over the longer term if Trump’s plans stoke inflation in the world’s largest economy. That, in turn, could derail easing cycles in the developing world.
“Until we get clearer policy direction from the US, it’s difficult to rule out EM FX remaining volatile,” said Razia Khan, chief economist for Standard Chartered Bank.
The Republicans’ unified control of the elected branches of government signals an easier path for the incoming president to implement his plans, while the selection of “hardliners” for many positions may be helping the dollar to gain, according to Michael Pfister, an FX analyst at Commerzbank AG.
“This would also make other election announcements more likely, which would lead to higher inflation in the medium term,” Pfister said. “At the moment, the market is only focusing on the dollar-positive factors of these election promises and ignoring the potential problems.”
The Bloomberg Dollar spot index is up 1.6% this week, trading at the highest since November 2022.
The Malaysian ringgit and Indonesian rupiah were among the worst performers Thursday, while the Chilean peso and Peruvian sol led gains. Latin American currencies, which started the day mostly lower, rebounded and were gaining against the dollar.
Mexico’s central bank extended its monetary easing cycle with a 25 basis-point cut, bringing the benchmark interest rate to 10.25%. The peso gained as much as 0.6% before trimming gains. The nation’s credit outlook was cut to negative from stable by Moody’s Thursday.
