Emerging Market Currencies React to Middle Eastern Tensions and Global Tariffs

Emerging market currencies faced fluctuations amidst rising geopolitical tensions in the Middle East and recent global tariff developments. Market indices, including Chinese yuan and Hungarian forint, were affected by changing investor sentiment and local economic policies. Federal Reserve actions and other geopolitical factors further influenced market stability.

Emerging market currencies remained mostly muted on Tuesday, as fragile sentiment dominated amidst escalating tensions in the Middle East following the weekend clash between Hezbollah and Israel.

MSCI's index for emerging market stocks dropped 0.3% as of 0830 GMT, with a currency gauge down 0.2%. The Chinese yuan fell from its three-week highs to 7.1296 per dollar, slipping 0.1% in offshore trade. Chinese EV makers and steel producers also felt pressure following Canada's announcement of a 100% tariff on Chinese electric vehicles and a 25% tariff on imported steel and aluminium.

Hungary's forint slipped 0.1% against the euro, ahead of an anticipated pause in the Hungarian central bank's easing cycle. This pause comes after a surprising interest rate cut in July, bolstered by higher than expected inflation rates in July.

At the end of the last week, emerging market currencies experienced gains following comments from Federal Reserve Chair Jerome Powell indicating an impending interest rate cut, echoed by San Francisco Fed President Mary Daly on Monday. However, escalating geopolitical concerns paused these gains as Hezbollah launched hundreds of rockets and drones at Israel on Sunday, leading to a significant military response from Israel.

In Asia, the Philippine peso and South Korean won led currency losses, while Russia's rouble and South Africa's rand remained stable. Bourses across emerging Europe showed mixed results, with Hungary's benchmark index falling by 0.7%.

** Highlights: IMF reaches staff-level agreement for Liberia on a $209 million credit facility. China's PDD saw a $55 billion market cap loss due to uncertain market conditions. Russia launched missile and drone attacks on Ukraine for the second consecutive day. IMF eased conditions on Egypt's $8 billion finance package.

(With inputs from agencies.)