April 7 (Reuters) – Russia’s rouble hit a five-month low on Wednesday as concerns over strained relations with the West weighed, while many other emerging market currencies retreated as the dollar appeared to have paused its losses.
The rouble dropped about 1.1%, leading losses across Europe, the Middle East and Africa (EMEA) as investors fretted over a possible Russian military build-up near eastern Ukraine, which could lead to response from the West.
This offset optimism over a possible interest rate hike by the Russian central bank, after higher-than-expected March inflation data strengthened the case for policy tightening.
“In our view, the March inflation data and the balance of risks are in favour of 50bps hike. However, this outcome seems to be fully priced in due to fears over military escalations in Donbass,” Credit Suisse analysts wrote in a note.
Other EMEA currencies also dropped, with Turkey’s lira extending losses after disappointing inflation data on Monday. The unexpected sacking of the country’s central bank head last month had pushed the lira to record lows.
South Africa’s rand retreated from five-week highs, a recent dip in the dollar and bond yields having benefited the currency.
The dollar hovered around a two-week low, but appeared to have stabilized after large losses in recent sessions. Investors were also awaiting the minutes of the Federal Reserve’s last meeting to gauge the bank’s stance on policy tightening.
Optimism over a swift economic recovery in the United States had pushed up the dollar and treasury yields this year, pressuring emerging market bonds and currencies as investors sought more reliable returns in U.S. assets.
While emerging market economies are also eventually expected to recover, the International Monetary Fund forecast a mixed path to pre-pandemic levels, with many economies outside Asia likely to lag their peers.
G20 officials are also set to meet today and decide on a $650 billion boost to the IMF’s emergency reserves, as well as extending efforts to help developing economies struggling with the COVID-19 pandemic.
Emerging market stocks retreated from a more than two-week high on Wednesday, with most Asian and EMEA bourses trading lower.
In central Europe, Hungary’s forint marked small gains to the euro, hovering around one-month highs as the central bank’s hawkish stance continued to support the currency.
(Reporting by Ambar Warrick in Bengaluru; editing by John Stonestreet)