The MSCI emerging-market currency index fell as much as 0.4%, with currencies across the developing world heading lower. The Brazilian real and the Colombian peso ranked among the biggest losers on the session.
“Markets are overwhelmed because tariffs, inflationary dynamics and geopolitical armed conflict make for a very gloom-and-doom outlook,” said Juan Perez, director of trading at Monex USA. “This helps the dollar: war, trouble, the potential for commercial trade to be shaken at any given moment.”
The dollar index has been gaining ground in the past few sessions, accumulating a 0.85% gain so far this week. Still, while the greenback has been rallying following the latest economic indicators in the US, some expect the rally to be
short-lived.
“The longer term drivers behind the USD bear market remain firmly in place,” said Paresh Upadhyaya, director of fixed income and currency strategy at Pioneer Investments. “July- September is when we should start to feel the effects of tariffs and stricter immigration policies.”
Earlier in the session, emerging-market currencies briefly pared losses after data showed that US wholesale inflation was little changed in June, restrained by a decline in services that suggests companies are absorbing at least some of the costs from higher import duties. The data initially pushed the dollar lower as traders reevaluated the Federal Reserve rate path ahead, reinforcing bets that the monetary authority will cut rates this year.
“The market has taken comfort from the soft PPI services components to reflect softer domestic demand, despite the upward inflationary pressure on goods components from tariffs,” said Dan Pan, an economist at Standard Chartered Bank. “This probably revived some market hope that improving inflation dynamics could provide the Fed with more room to cut rates and support the economy this year.”
Still, US officials are cautious on the path ahead. Federal Reserve Bank of Dallas President Lorie Logan said that policymakers will likely need to hold interest rates steady for a bit longer to fully cool inflation. It was also possible that they may need to pivot to cutting if inflation and labor markets soften, according to Logan.
Meanwhile, the benchmark EM equity index fell 0.4%, paring this week’s gain to less than 1%.
In other markets, Indonesia’s central bank cut its benchmark interest rate and said it’s ready to ease further if needed, welcoming a trade deal with the US unveiled by Trump on Tuesday.
And in the Middle East, Israel intensified attacks on Syria on Wednesday, striking the military headquarters in Damascus and moving more troops to the border area.
Reporting by Leda Alvim and Selcuk Gokoluk
