Currencies hit by firm dollar ahead of Fed chair testimony, stocks slip

REUTERS: A strengthening dollar hit emerging market currencies yesterday ahead of US Federal Reserve Chair Jerome Powell’s two-day testimony to Congress, while stocks gave up all the gains they made in the previous session.

The MSCI’s index for emerging market currencies dropped 0.4% as a bout of risk-aversion took hold, with investors awaiting direction from Powell on whether another 75 basis-point interest rate hike is probable at the Fed’s July meeting.

This helped lift the dollar by 0.4%, while South Africa’s rand, considered a proxy currency for the developing world, weakened 0.7%.

Data showed South Africa’s headline consumer inflation quickened to 6.5% year on year in May versus 5.9% in April. The upper bound of the central bank’s target range is between 3% and 6%.

A hawkish tilt from major central banks in the face of surging inflation has sparked fears of a global recession and a flight to safety, while most analysts also point to a slowdown in China hurting many major EM players.

Emerging market stocks tumbled more than 2%, on track for their biggest one-day percentage drop in nine days. Heavyweight China shares and Hong Kong stocks fell amid growing worries over the impact of COVID-19 restrictions.

Turkey’s lira steadily weakened against the greenback as investors await the central bank’s latest official reserves data on Thursday. Forex reserves have dropped sharply in Turkey, most recently due to the billions of dollars the bank sold in market interventions to stem a currency crisis in December.

Turkey’s consumer confidence index hit a record low in June on worries about galloping inflation.

The Czech crown was flat ahead of a meeting of the Czech National Bank, with expectations of a 75 basis-point to 125 basis-point rise in the key two-week repo rate. This will be the last meeting of the bank before incoming governor Ales Michl takes over. Michl has consistently voted against rate hikes during the central bank’s year-long tightening cycle worth a total of 550 basis points so far.

“Even though the dovish threat has not materialised, the market consensus still anticipates this large 75 bps rate hike today,” said Tatha Ghose, FX and EM analyst at Commerzbank.

“Inflation pressures in the region have not abated. Hence, even though the political risk may have dissipated somewhat, it is unlikely that CNB will go back on its promise of a large rate hike.” Sri Lanka will hold a donor conference with China, India and Japan as it seeks overseas assistance to find a way out of its worst economic crisis in decades, Prime Minister Ranil Wickremesinghe told Parliament.