Updated March 24th, 2024 at 13:00 IST

EM currencies face pressure as Dollar strengthens; Colombian Peso gains

The MSCI index tracking Latin American currencies dropped by 0.4% for the day and 0.2% for the week, marking its first weekly decline since March's outset.

Reported by: Business Desk
Emerging Market Currencies | Image:Unsplash
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EM in focus: Emerging market currencies experienced a decline on Friday, marking their worst performance since January, primarily impacted by the strengthening dollar. 

However, the Colombian peso stood out among its peers, witnessing a surge after the country's central bank announced a reduction in interest rates alongside upgraded growth forecasts.

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The MSCI index tracking Latin American currencies dropped by 0.4 per cent for the day and 0.2 per cent for the week, marking its first weekly decline since March's outset.

In contrast, Colombia's peso defied the trend, registering a 0.4 per cent increase following the central bank's anticipated 50-basis-point interest rate cut coupled with an optimistic outlook on economic growth.

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The global emerging market currency index plummeted by 0.7 per cent, experiencing its most challenging week since January. 

The downturn coincided with the dollar's ascent to its strongest performance in ten weeks, while the Chinese yuan faced depreciation.

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The week witnessed major market movements, including Japan's historic rate hike and Switzerland's unexpected rate reduction. Meanwhile, the US Federal Reserve maintained its projection of three rate hikes in 2024.

Analysts at BCA Research highlighted that borrowing costs are likely to remain high in real terms, particularly in the US and Europe, which could impede domestic demand. They also noted tepid domestic demand in China and other emerging markets, with risks skewed to the downside.

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Colombia's policy decision came on the heels of Mexico's first rate cut since 2021 and Brazil's reduction of 50 basis points earlier in the week.

Across Latin America, currencies such as Brazil's real, Chile's peso, and Peru's sol depreciated against the dollar by margins ranging from 0.3 per cent to 0.8 per cent.

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Meanwhile, Argentina's dollar-denominated international bonds rallied, reflecting investor optimism regarding President Javier Milei's promises of economic reform.

In Mexico, data revealed a rise in consumer prices in the first half of March, alongside better-than-expected core inflation figures. However, the economy contracted by 0.6 per cent in January compared to December, with a 2 per cent year-on-year expansion.

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The Mexican peso dipped by 0.2 per cent in response.

The Latin American stocks gauge experienced a 0.9 per cent decline, its steepest drop in two weeks, led by nearly a 1 per cent loss in Brazilian stocks.

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Russia's central bank maintained its interest rates at 16 per cent, citing persistently high inflationary pressure. 

Consequently, the Russian ruble weakened, nearing the 93-per-dollar threshold.

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Liam Peach, senior economist at Capital Economics, suggested that an easing cycle might commence in Russia in the third quarter once inflation peaks.

(With Reuters Inputs)

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Published March 24th, 2024 at 12:59 IST