Israel-Iran Crisis: Emerging market currencies feel impact, Index drops to year’s low

Israel-Iran Tensions Impact: Emerging-market currencies fell to a new low for the year as the dollar extended gains into a fifth day amid heightened geopolitical tensions and after robust US data boosted bets the Federal Reserve will delay interest-rate cuts.

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The MSCI EM Currency Index dropped 0.2% on Tuesday to the lowest since December. The US currency got an extra boost in early Tuesday trading after China moved to weaken the daily reference rate for the yuan after sustained dollar pressure.

Haven demand for the greenback has also increased after Iran’s attack on Israel pushed conflict between the two countries into a perilous new phase.

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China Loosens Grip on Yuan by Weakening Fixing as Dollar Gains

“The undesired mix of geopolitics, high for longer rates and volatility in yuan and yen may continue to undermine sentiments in Asia ex-Japan currencies,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. in Singapore.

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Stronger-than-expected US economic data has damped bets on Fed rate cuts, suggesting the battle against dollar strength isn’t going to end anytime soon. That has led to an increase in currency intervention across emerging markets, especially Asia, as the dollar's strength piles pressure on officials to act.

Meanwhile, any weakening in China’s managed currency can have an outsized impact as it is seen as an anchor for its regional peers. Most under threat are the currencies of Asian neighbors such as South Korea and Thailand, where China is the number one trading partner but a suddenly weaker yuan may have a much wider effect.

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South Korea’s Won dropped to the closely-watched psychological level of 1,400 per dollar for the first time since late 2022, while Malaysia’s ringgit is close to the lowest since 1998.

Malaysia’s central bank on Monday signalled that it stood ready to support the ringgit, which is hovering close to a 26-year low.

The MSCI EM index has fallen 1.8% this year.

The dollar’s strength and broader risk aversion saw Asian stocks extend their losses from Monday, with a benchmark of the region’s emerging-market equities sliding close to 2%. Korea and Taiwan led the declines, with their gauges slumping about 2.5% each.