The rise in the US dollar, along with a «confluence of negative news», triggered the biggest sell-off in emerging market currencies since the start of the Federal Reserve's aggressive interest rate hike campaign two years ago, writes the FT. JPMorgan's index, which tracks the performance of emerging market currencies, has fallen more than 5% over the past two and a half months, on track for its biggest quarterly decline since September 2022. The decline is wide-ranging, affecting at least 23 currencies monitored by Bloomberg, which depreciated against the dollar this quarter. The US dollar has registered a significant rise since the end of September, supported by market expectations that the incoming US president, Donald Trump, will adopt protectionist trade measures and relax fiscal policy immediately after taking office. «The dollar is in the spotlight as the main factor contributing to the weakening of emerging market currencies,» explained Paul McNamara, senior manager of bonds and emerging currencies at investment firm GAM. Last month, Donald Trump announced plans to impose 25% tariffs on all imports from Mexico and Canada, as well as an additional 10% tariff on products from China. As a result, the Mexican peso fell 2.1% in the quarter and the Chinese renminbi lost 3.7%. Globally, the South African rand, considered an indicator of emerging market sentiment due to its liquidity, has fallen by around 2.4% since the end of September. Even when taking into account the returns obtained from holding assets denominated in local currencies, only the currencies of countries considered very risky, such as Turkey and Argentina, generated gains for investors this quarter. The magnitude of this post-election sell-off also affected «carry trades» – strategies by which investors borrow in low-interest-bearing currencies such as the dollar or yen to buy higher-interest-bearing emerging market currencies. According to Citi, a basket of popular carry trades for European currencies has returned just 1.5% this year, in line with the 10-year average, but well below the 7.5% return in 2023. European Union member states have not experienced a quarterly decline of such magnitude since 2022, when the Federal Reserve adopted strict measures to counter inflation. As US interest rates rose, the widening gap with EU rates increased pressure on European currencies. The recent drop makes JPMorgan's index of emerging market currencies record its seventh consecutive annual decline.
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