Emerging-market currencies moved lower on Wednesday morning as Brent crude rose above $117 per barrel and the U.S. dollar gained ground, with market participants reacting to an extended standoff between the U.S. and Iran over the Strait of Hormuz.
MSCI's Emerging Market Currency Index fell 0.3%, paced by steeper losses in the Chilean peso, the South African rand and the South Korean won. A related gauge that tracks developing-nation equities surrendered earlier gains and was trading roughly flat.
Crude oil advanced by more than 5% after U.S. officials indicated they would sustain a naval blockade of Iranian ports in an effort to curb Tehran's oil exports and press the country back toward negotiations. The jump in oil prices intensified a market shift toward safer assets that began on Tuesday, supporting the dollar and exerting downward pressure on global equity markets.
Market participants have also been trimming expectations for when the Federal Reserve will begin cutting interest rates, with many now pushing anticipated easing further into next year. A Federal Reserve meeting scheduled for Wednesday was widely expected to reflect a more hawkish stance.
Currencies of oil-importing nations bore much of the impact. The Chilean peso and the South African rand each fell by more than 1%, while the rand was on track for its steepest drop in over a month. Chilean authorities had left interest rates unchanged on Tuesday and warned that the conflict could pose a more significant threat to global growth and inflation.
The Thai baht slid as much as 0.6% after the Bank of Thailand kept its policy rate at 1%, citing concerns about the economic effects of the rise in oil prices.
Market context and implications
- Higher oil prices and a stronger dollar pushed investors toward safer assets, creating downward pressure on emerging-market currencies and weighing on developing-nation equities.
- Shifts in rate-cut expectations for the Federal Reserve contributed to a more cautious tone across global markets ahead of a scheduled Fed meeting.
- Central banks in affected economies are watching the inflation and growth implications of the oil-price surge while maintaining their current policy settings.