Emerging Market Currencies Surge Amid Central Bank Policy Shifts

Investor confidence in a looming U.S. Federal Reserve interest rate cut pushed an emerging market currency index to a record high, while key central banks globally revealed their policy shifts. U.S. rate cuts might allow more flexibility for EM central banks. Gulf markets and currencies also reacted positively.

Investor confidence in an anticipated U.S. Federal Reserve interest rate cut propelled an emerging market currency index to a record high on Monday. The MSCI index for EM currencies experienced its largest one-day gain since August 19, driven by expectations of a 50 basis point (bps) rate cut by the Fed this Wednesday, LSEG data revealed.

The impending policy shift was fueled by last week's 25-bps cut from the European Central Bank. Analysts, including Mohit Kumar from Jefferies, foresee further cuts of 25 bps from the Fed in November and December, which could afford emerging market central banks more maneuverability for easing policies and stimulating local growth.

Latin America's and emerging Europe's central banks have already led an easing cycle across half of the emerging markets monitored by Reuters. Gulf markets were strengthened by rising oil prices while anticipation for the U.S. rate cut saw key stock indices rise. U.S. rate cuts influence GCC monetary policy due to most regional currencies pegged to the dollar.

(With inputs from agencies.)