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(BN) Emerging Currencies Pare Losses as US PCE Boosts Fed Cut Bets

(Bloomberg) -- Emerging-market currencies pared earlier losses after the Federal Reserve’s favorite inflation gauge moderated, boosting bets for rate cuts this year. MSCI’s index for EM currencies gave up some of the losses after declining as much as 0.2%, while a similar gauge for emerging stocks was little changed, holding on to its earlier losses.

Appetite for risk assets had a brief relief after data showed that so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.2% in April from the prior month. Inflation-adjusted consumer spending unexpectedly fell 0.1%.

“Today feels like a bit of a break since spending in the U.S. contracted slightly and gave room for the dollar to give away some value,” said Juan Perez, director of trading at Monex USA.

Despite the post-data recovery, the benchmarks in developing currencies and stocks are set for the biggest weekly losses since April 19 as the debate over when the Federal Reserve will begin cutting interest rates continues to damp risk appetite.

“The recent commentary by Fed officials, accompanied by evidence that the U.S. is not in dire need for stimulus via rate-cuts, is making for a close of May that is not EM friendly,” Perez said.

Brazil’s real is the worst performing among regional peers and in the world Friday, with intense selling pressure pushing the currency down 0.5%, as traders seek dollars in the last trading session of the month. The Polish zloty, Hungarian forint and Colombian peso are leading gains.

South Africa’s rand is one of the worse performers among peers this week as a drop in support for the ruling African National Congress in elections this week and the outlook for a coalition government stoked uncertainty over future policy shifts. The benchmark stock index was steady after a decline Thursday that threatened to wipe out the gauge’s gains for the year.

The Mexican peso gained for the first time in four sessions before voters head to the polls on Sunday. The peso is the second-worst performing emerging-market currency this week behind the Indonesian rupiah.

Reporting by  Zijia Song and Colleen Goko

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