Emerging Markets Gain 0.3% as Funds Flee US

This week, currencies and stocks in developing countries experienced an upward trend as funds continued to flow out of the United States, drawing investor attention to undervalued assets in emerging markets. The MSCI Emerging Markets Currency Index rose 0.3% on Monday, reaching its highest level since early October of last year. Among the currencies tracked by Bloomberg, the Polish zloty, Hungarian forint, and Romanian leu saw the most significant gains.

The so-called "sell America" trade, fueled by concerns over a slowing U.S. economy and recent speculation about President Donald Trump potentially firing Federal Reserve Chairman Jerome Powell, has led to a decline in U.S. stocks and the dollar. The dollar briefly fell to its lowest point since the end of 2023.

Brad Bechtel, head of foreign exchange at Jefferies, commented, "This is a rotation from the U.S. to Europe, which also benefits some emerging markets."

Jayati Bharadwaj, a foreign exchange strategist at TD Securities, believes that the Federal Reserve's rate cuts will further weaken the dollar in the second half of the year, creating a favorable backdrop for emerging markets.

On Monday, Trump intensified his criticism of Powell, warning that the U.S. economy could slow down if the Federal Reserve does not immediately cut interest rates, and labeling Powell a "failure."

While the U.S.'s short-term struggles have enhanced the appeal of emerging markets, investors will closely monitor signs of a global economic slowdown. If this scenario materializes, it could significantly impact developing economies and dampen risk appetite.

Thierry Wizman, a macro strategist at Macquarie Group, stated, "As long as the impending global economic slowdown has a relatively minor impact on emerging markets, the rebound in these markets can continue. However, I am concerned that we will ultimately see the economic slowdown affect emerging markets."

In Latin America, the Mexican peso reversed some of its earlier gains against the dollar, while the Brazilian market was closed for a local holiday.

Emerging market stock indexes also rose by 0.3%, narrowing their losses for the month so far. In the credit market, countries more sensitive to oil price fluctuations, from Angola and Gabon to Colombia, performed poorly. Brent crude oil prices fell by more than 2% due to growing concerns over global energy demand.