Emerging Markets Start 2021 With a Record as Dollar Stumbles

Emerging-market currencies surged to a record on the first trading day of 2021 as traders brushed aside the accelerating spread of the coronavirus.

MSCI Inc.’s index of developing world currencies climbed as much as 0.7% to 1,731.69, surpassing its previous record set in March 2018 before the U.S.-China trade war hobbled risk appetite. The Bloomberg dollar index fell to the lowest in almost three years before regaining some ground as U.S. stocks declined.

Emerging Markets Start 2021 With a Record as Dollar Stumbles

Investor sentiment is improving as coronavirus vaccines are rolled out and data point to a broad-based uptick in economic activity, underpinned by unprecedented central bank stimulus. That’s pushing investors toward the higher returns of riskier emerging-market assets while undermining the case for the U.S. dollar, the haven currency of choice.

“Uncertainty is diminishing and the strong global growth recovery should favor the rest of the world,” said Patrik Schowitz, global multi-asset strategist at JPMorgan Asset Management, which is underweight the dollar. The currency’s weakness is likely to be most notable “against the emerging markets foreign-exchange, which should have cyclical upside and is still relatively cheap.”

The Chilean peso and Indonesian rupiah were among the biggest gainers for developing-nation currencies on Monday. The euro rose as much as 0.8% against the dollar toward a high last reached more than two years ago, while the greenback touched the weakest against the Chinese yuan since June 2018.

Emerging Markets Start 2021 With a Record as Dollar Stumbles

“Vaccination is creating more risk appetite,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank. “With the developed markets central banks stuck at their respective lower bounds, this is unfolding in a very spectacular manner in EM currencies.”

Emerging Markets Start 2021 With a Record as Dollar Stumbles

After an initial slump triggered by the Covid-19 outbreak, a rebound in demand for risk assets drove the emerging-market index to a second yearly advance in 2020. Flows may continue through this year as investors take comfort from supportive monetary and fiscal measures as well as the global vaccination drive, according to Piotr Matys, a strategist at Rabobank in London.

The rally “reflects a sharp acceleration in capital inflows into emerging markets,” he said. This “won’t set the tone, which is already positive.”

China ‘Standout’

China’s yuan is likely to be a “standout” beneficiary from a weaker dollar thanks to “yield erosion and twin deficits” that are weighing on the greenback, said Patrick Bennett, strategist at Canadian Imperial Bank of Commerce in Hong Kong. The onshore yuan rose as much as 1.1% on Monday and breached the 6.5 level for the first time since June 2018.

“The markets are following the 2021 buy-everything play book to the tee,” said Stephen Innes, a strategist at Axicorp.

©2021 Bloomberg L.P.

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