After the U.S. Federal Reserve indicated a slower pace of rate cuts in the upcoming year, risk aversion took over, causing emerging Asian equities to plummet to multi-month lows and currencies to slump versus a strong dollar on Thursday. The MSCI emerging markets currency index plummeted 0.5% to its lowest level over four months, while the broader MSCI index of international developing markets shares plunged as high as 1.6%. As anticipated, the U.S. central bank lowered interest rates on Wednesday. Still, Chair Jerome Powell stated that more borrowing cost reductions now depended on continued success in bringing down persistently high inflation. The Fed’s hawkish stance caused traders to reduce their expectations for next year’s rate cuts significantly, and it also caused the dollar to approach a two-year high.
“Powell’s pivot back to price stability risks has seen the markets rapidly unwind expectations on further cuts next year, pushing yields and the U.S. dollar higher and tightening financial conditions meaningfully across the globe – kryptonite for EM asset prices,” said Kyle Rodda, senior financial market analyst at Capital.com.
Already weakened by internal political unrest, South Korea’s win fell 1% to its lowest level in 15 years. For the first time, dealers said the central bank was probably selling dollars to stabilize the Indian rupee when it fell below 85 to the US dollar. In its eighth consecutive session of losses, the Indonesian rupiah dropped more than 1% while the Malaysian ringgit declined 0.8%. The impact of the Fed’s policy outlook, according to Bank Indonesia (BI), was the reason for the rupiah’s precipitous decline to a new four-month low. BI also stated that it will take action to stabilize the currency against any undue volatility.
The decline occurred even though the BI maintained interest rates unchanged on Wednesday to boost the rupiah. However, Maybank analysts warned that there are short-term downside risks to the dollar gain because markets frequently overshoot on the Fed’s validation, only to be corrected by later data releases. Additionally, regional equities plummeted; in Jakarta, they fell as much as 2.2% to their lowest level in almost six months. Taiwanese and Indian stocks fell 1.8% and 1%, respectively. As traders anticipate the central bank’s announcement later in the day, Manila stocks fell 2% to their lowest points since late June.
As inflation remains under control and the economy deteriorates, the Bangko Sentral ng Pilipinas (BSP) is anticipated to lower interest rates by a quarter point for the third consecutive week. As financial markets tested the Brazilian government’s spending plans and large budget deficit, the country’s real fell to a record low among other emerging economies.
