EM-Recession fears drive EM currencies to 20-month lows

Emerging market currencies sank to their lowest in 20 months on Tuesday as the dollar stood tall amid growing worries of a recession, with a surge in European gas prices hammering markets in central and eastern Europe.

Euro-linked currencies such as the Hungarian forint, Polish zloty and Romanian leu weakened by almost 2% against the dollar as the euro slumped to a two-decade low.

MSCI’s index of developing world currencies dropped 0.4% to its lowest since November 2020.

European gas prices surged after flows from Russia dipped and strikes at Norwegian oil and gas infrastructure added to concerns over supply, exacerbating fears over spiralling inflation and slowing economic growth.

“The fear of recession is once again coming stronger,” said Stuart Cole, head macro economist at Equiti Capital.

“The problem is that a lot of emerging market borrowing is denominated in the US dollar. As the Federal Reserve raises interest rates, that is making the cost of debt borrowing more expensive, and at the same time, the value of the dollar is strengthening further.”

A key part of the US Treasury yield curve briefly inverted for the first time since mid-June, reflecting concerns that hefty interest-rate hikes could tip the US economy into a recession.

The Hungarian forint tumbled to a record low versus the euro at 406.44 as a relief rally following the central bank’s big interest rate hike last week proved short-lived.

The Polish zloty slid 0.5% ahead of its central bank meeting on Thursday, where the bank is expected to raise its main interest rate by 75 basis points to 6.75% to tame inflation that is running at a 25-year high.

Indian rupee touched a record low at 79.15 per dollar, while Korean won ended down over 1% after data showed inflation last month hit a 24-year high.

Stock markets in Prague, Warsaw and Budapest fell less than a percent, while South African equities dropped 1.3%.

The EM equities index slipped as the souring global mood offset optimism over positive economic data in Asia and a report that US president Joe Biden was leaning towards a decision on easing tariffs on goods from China.