Emerging market currencies fall on chance of Fed rate hike

June 01, 2016 (LBO) – Emerging-market currencies fell this week on the possibility that the Federal Reserve may raise interest rates in June or July.

Fed Fund futures predict a 23 percent chance of a U.S. rate hike in June, which rises to 59 percent by July, after Fed Chair Janet Yellen said the strengthening U.S. economy would probably warrant an increase in borrowing costs “in the coming months.”

The rand depreciated for a second day and China weakened the yuan fixing as the spot index extended its biggest monthly advance since September 2014, Bloomberg reported.

Developing-nation shares have fallen in five of the past six weeks as investors shifted out of riskier assets, paring the MSCI Emerging Markets Index’s 2016 gain to 1.8 percent.

“There’s been a repricing of Fed rate-hike expectations, so the environment will be less supportive for emerging markets in the days ahead,” said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole CIB in Paris.

“It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said Friday during remarks at Harvard University in Cambridge, Massachusetts. “Probably in the coming months such a move would be appropriate.”

The MSCI Emerging Markets Currency Index is down 3 percent in May. The won fell 1.1 percent and is Asia’s worst performer this month after Malaysia’s ringgit.

The yuan fixing was cut by 0.45 percent against the dollar sending the Chinese currency to a four-month low. The ringgit depreciated 0.9 percent, bringing May’s drop to 5.2 percent.