Emerging-Market Currencies Post Monthly Drop on Fed Rate Outlook

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Emerging-market currencies posted their biggest monthly drop this year as traders weighed the potential timing of an increase in the near-zero U.S. interest rates that have buoyed demand for riskier assets in developing nations.

The ruble led the decline in July, slumping 10 percent against the dollar. The Russian currency tumbled as oil, the country’s biggest export, sank into a bear market. Brazil’s real weakened 9.3 percent on mounting concern that the country’s credit rating will be cut to junk. Turkey’s lira fell 3.2 percent amid escalating violence along its border with Syria. A Bloomberg index of 20 emerging-market currencies dropped 3.4 percent, the most since December.

Investors have withdrawn from developing nations amid bets that the Federal Reserve is moving closer to raising benchmark borrowing costs for the first time since 2006. The currency gauge slipped to a record low on Thursday as data showing a strengthening U.S. economy supported the case for an increase. It jumped as much as 0.5 percent on Friday as the Labor Department said wages grew at the slowest pace on record in the second quarter, before closing 0.2 percent lower.

Currencies are “in a very tough spot now” as they are “super sensitive to fluctuations on U.S. short-end rates,” Luis Costa, a London-based strategist at Citigroup Inc., said by e-mail.

The MSCI Emerging Markets Index slumped 7.2 percent in July as all 10 industry groups dropped, led by an 11 percent plunge in energy stocks. Raw-material companies were the second-worst performers, declining 9.8 percent. The broader gauge rose 0.8 percent to 900.76 on Friday.

China Slump

The Shanghai Composite Index declined 14 percent in July amid record-high volatility. Traders have endured wide price swings as the government implemented unprecedented intervention measures to try to prop up mainland stock markets after a $4 trillion rout.

The ruble weakened 3.1 percent to 61.65 per dollar on Friday. The currency stayed lower after the central bank reduced its key interest rate by 50 basis points to 11 percent, as forecast by economists in a Bloomberg survey.

Brazil’s real declined 1.3 percent to a 12-year low. The currency dropped as budget reports added to concern that the country’s credit rating will be cut. Standard & Poor’s cited a slowing economy and fiscal turmoil when it changed its outlook to negative on Tuesday.

The lira rose 0.4 percent against the dollar after falling to a record low on Thursday. A week of violence roiled Turkish markets as offensives against Islamic State militants drove the currency and bonds lower.

The Shanghai Composite Index posted its biggest monthly drop since 2009. The gauge fell 1.1 percent on Friday.

The MSCI Emerging Markets Index has fallen 5.8 percent this year and trades at 11.3 times projected 12-month earnings. That compares with a multiple of 16.4 for the MSCI World Index, which has risen 3.1 percent in 2015.

The premium investors demand to hold emerging-market debt over U.S. Treasuries widened four basis points to 369 basis points, according to JPMorgan Chase & Co. indexes.