A gauge tracking emerging market currencies hit a record high on Monday, driven by waning expectations of U.S. interest rate hikes and a surge in demand for riskier assets. The index rose as much as 0.2% to 1,906.98, setting a new all-time high, while a similar measure for emerging market stocks advanced 0.6%.
A weaker U.S. dollar fueled the rally in emerging markets, as soft economic data from the U.S. reduced bets that the Federal Reserve will tighten monetary policy. "Emerging market currencies are supported today, largely due to a weaker dollar and a continued recovery in risk appetite in equity markets," said Wee Khoon Chong, senior Asia Pacific market strategist at Bank of New York Mellon. "We're seeing a strong rebound in foreign inflows into emerging markets, particularly in Asia."
According to U.S. swap market pricing, traders are now fully pricing in a 25-basis-point rate hike by the Fed before the end of January, compared to expectations for a move by the end of the year just a week ago. Weaker-than-expected U.S. retail sales data prompted traders to scale back their rate hike wagers. The Bloomberg Dollar Spot Index fell 0.2% on Monday, heading for a third consecutive day of declines.
"Asian currencies seem to have found a tailwind, thanks to weak U.S. economic data last week and a softer dollar early this week," said Galvin Chia, emerging Asia strategist at Societe Generale. "The lack of fresh geopolitical news over the weekend and Brent crude oil prices staying below $90 a barrel may have also helped, along with the apparent end of the thin summer trading volumes."
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