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(Bloomberg) — The dollar’s resurgence sent Latin American assets into a tailspin with the Brazilian real and Colombian peso leading developing-world currency declines.
The emerging-market currency gauge dropped near the lowest in two months as traders flocked to the safety of the greenback ahead of key data releases in the US this week that may provide clues on the path of interest rates in the world’s largest economy. Chile and Mexico’s peso also took a beating, while an index for the region stocks sank.
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Uncertainty from Mexico to Brazil and Colombia has led investors to ditch the currencies, which had drawn interest in the months prior amid relative stability and high interest rates.
“During the last few weeks, domestic politics and policy sucked all the air out the room in Latin America,” Alejo Czerwonko, chief investment officer Emerging Markets Americas at UBS Global Wealth Management, said in a note.
Brazilian swap rates rose Wednesday even as inflation came in lower than expected, signaling traders are betting President Luiz Inacio Lula da Silva’s increased spending will force the central bank to hike rates.
Investors will be on the lookout for Mexico’s central bank rate decision this week, the first one since the leftist party scored a majority in congress and another presidential term. They’ll turn to Colombia next, where policymakers are expected to keep easing amid President Gustavo Petro’s spending cuts.
With no Fed speakers scheduled Wednesday, US inflation data Friday and weekly employment figures the day before will be in focus.
Also propelling the dollar is policymakers’ divergence with global peers from Europe to Canada, where easing campaigns are underway.
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“The USD will remain stronger for longer,” Deutsche Bank’s Alan Ruskin wrote in a note Tuesday, adding the firm favors currencies from Chile, Brazil and India. “We have likely passed the cyclical nadir for short-term volatility.”
European politics is also spooking risk takers. Marine Le Pen’s National Rally is polling in first place for the parliamentary elections that begin Sunday in France, fueling anxiety among investors that’s also affecting the EU’s east. The Polish zloty and Czech koruna also underperformed.
“Global conditions for Central and Eastern Europe and the entire emerging-markets space deteriorated again yesterday, worsening the overall picture,” strategists at ING Bank wrote in a note.
Bonds from Nigeria and Ecuador outperformed, while Kenya’s dollar debt was largely unchanged after President William Ruto said he’s withdrawing a contentious tax bill after deadly protests against his plan to raise $2.3 billion in new levies. Sri Lanka reached a final pact to recast $10 billion of its external debt.
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