(Bloomberg) — Emerging-market currencies rose on Friday, capping a turbulent start to August with the biggest weekly gains of 2024, as a weaker dollar and a global equities rebound boosted risk appetite.
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The MSCI EM currency index rose for a second day, briefly trading at its highest level in two years. The South Korean won, Malaysian ringgit and Israeli shekel led the advance. Meanwhile, stocks climbed, led by Taiwan Semiconductor Manufacturing Co., which reported a surge in its July sales amid robust demand for artificial-intelligence chips.
Even as a global unwinding of carry trades took hold this week, emerging-market currencies showed resilience as a stronger Japanese yen also meant a weaker dollar, with its potential to channel flows into riskier assets. The erosion in the yield and carry of long US-dollar positions will support EM currencies, bonds and rates, Societe Generale SA strategists including Phoenix Kalen wrote in a note Friday.
“As the market continues to position for the upcoming Fed cut and the continued unwind of carry trade, EM currencies would rise against the dollar, with low carry EM currencies to outperform the higher yielding ones,” said Stephen Chiu, chief Asian FX strategist at Bloomberg Intelligence.
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Growing bets that the Federal Reserve will cut interest rates in the coming months are weighing on the dollar, easing pressure on central banks in developing nations to defend their currencies. Authorities in nations from India to Indonesia have intervened in the market to prop up their currencies this year.
The gains should continue till the next Fed rate decision unless officials push back with a more hawkish tone in the coming days or US economic data throw up any upside surprises, according to Chiu.
(Updates with analyst comment)
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