Emerging Market Currencies Gain as Investors See ‘Stars Align’

(Bloomberg) — Emerging market currencies gained as President Donald Trump’s move to extend a deadline for aggressive tariffs on the European Union bolstered risk appetite, while trading volumes remained thin due to holidays in the US and the UK.

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MSCI’s gauge of EM currency returns climbed as much as 0.4% to an all-time high as the dollar hovered around its lowest level in almost two years. Risk-on sentiment was also evident in some equity markets, though MSCI’s broad gauge for stocks fell. With a rise of 2%, South Korea’s benchmark was the standout, while India’s flagship Nifty 50 gauge climbed 0.6%.

“We’re starting to really see the stars align now,” Amy Oldenburg, head of emerging market equity for Morgan Stanley Investment Management. “We’ve seen the dollar weakening quite considerably — that’s really given a tailwind to some of our markets.”

The move came as Trump extended the tariff deadline on the European Union until July. The EU agreed to accelerate negotiations with the US to avoid a transatlantic trade war, following a phone call between Commission President Ursula von der Leyen and Trump — just days after the US president criticized the bloc.

Enthusiasm for the greenback has faded this year due to Washington’s unpredictable trade policy and concerns about the fiscal deficit, with developing-nation currencies some of the major beneficiaries. The Polish zloty was the top gainer in emerging markets on Monday. Brazil’s real, meanwhile, underperformed peers amid jitters over fiscal policy and new tax measures.

“Trump’s unpredictable trade and fiscal policies mean investors must hedge US exposure more carefully and reallocate away from US assets,” said Henrik Gullberg, macro strategist at Coex Partners Ltd.

Tariff Impacts

While Trump’s decision to extend the tariff deadline for the EU helps EM currencies, “gains have been relatively modest so far,” said Piotr Matys, a senior analyst at inTouch Capital Markets. That can “be attributed to concerns that Trump’s tariffs may have stagflationary consequences for the US economy, which for many EM countries is the most important trading partner.”

As for the US — tariffs have yet to materially boost official inflation readings — the impact is likely to become more apparent later this year. US economic growth is expected to cool, with many businesses becoming more guarded about the outlook as tariffs boost costs and weigh on consumer sentiment.