Traders who anticipated lower interest rates in developing nations are reversing course as prospects for reduced Federal Reserve economic stimulus sparks the worst rout in emerging-market currencies since 2001.
Just a month ago, central bankers in Mexico , India and South Korea were expected to pare borrowing costs at least once, according to interest-rate swaps data compiled by HSBC Holdings Plc. Now, the measures show no chance of cuts. Traders anticipate one more reduction in Poland and Hungary, instead of the two they expected a month ago.
Fed Chairman Ben S. Bernanke said June 19 that $85 billion of monthly bond purchases may end by mid-2014, helping drive this year’s 7.8 percent slide in India’s rupee and 7.5 percent drop in the Polish zloty. Weakening currencies are threatening to ignite inflation, forcing central banks in emerging markets to curtail interest-rate cuts even as their economies expand at the slowest pace since 2009.
“You’ve got this conundrum for the central banks where they are suffering from weakening growth at the same time as currency selloffs and capital withdrawals make it difficult for them to respond,” Matthew Lehmann, a strategist at JPMorgan Chase & Co., said in a June 25 interview from New York . “There’s very limited room to ease.”
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