MSCI’s gauge for emerging-market currencies fell as much as 0.4%, as the dollar rose for a second straight day. An EM equity index dropped by a similar amount, reducing its gain in the year to date to 1%.
The mood soured after Trump pledged tariffs on foreign- produced semiconductors, pharmaceuticals and some metals to compel producers to manufacture in the US. While Trump’s advisers are said to be considering gradual hikes of 2% to 5%, the president said he wants “much bigger” increases.
“Every emerging country that either shipped raw materials or sub-components to China for final assembly into Western Europe or the United States will need a new business model,” said Michael Kelly, global head of multi-asset at PineBridge Investments. “Trump is going to play very, very hardball so growth in many of these areas is going to slow.”
The Brazilian real and the Mexican peso bucked the drop in currencies, with the latter recovering from a 2% drop on Monday when jitters around potential tariffs on Colombia and a general flight from risk pushed it lower.
Investors are now mulling Trump’s comments against the Federal Reserve’s rate decision on Wednesday, with expectations that policymakers will pause the easing cycle. “The Fed cannot cut interest rates with the economy and inflation as they are, which makes us think that the US dollar could rally for the rest of January,” said Juan Perez, director of trading at Monex USA.
A slew of rate decisions in other parts of the world are expected this week, with the earliest being Chile’s later on Tuesday. Central banks in Brazil, Canada, the Eurozone, South Africa and Colombia are all scheduled to discuss monetary policy in the coming days.
The South African rand bucked the broader weakness, reversing earlier losses after the Democratic Alliance said it remains committed to the national unity government, despite a dispute over new laws approved by President Cyril Ramaphosa. In emerging Europe, the Hungarian forint weakened, pausing a recent rebound against the euro, even after the central bank adopted a more hawkish monetary policy guidance. Serbia’s dollar bonds due 2024 fell as the prime minister resigned after weeks of student protests, pushing the yield 6 basis points higher to 6.24%.
In Latin America, the Colombian peso extended its decline after a committee that oversees fiscal limits reported that the country’s 2024 budget deficit exceeded the government target.
Meanwhile, US short sellers are making the biggest bets in two years against local-currency sovereign bonds in emerging markets, where the average yield has been below that of US Treasuries for the past eight weeks.
