Emerging-Market currencies under threat as Trump odds rise

A potential return of Donald Trump as the next US president may bring bad news for emerging-market currencies, given the threat of his protectionist economic policies. 

The South Korean won led the broader declines in Asia after the assassination attempt on Trump over the weekend boosted his odds of winning the presidency. Indonesia’s rupiah and Thailand’s baht snapped eight days of gains, while Malaysia’s ringgit slipped from its highest level in January. 

Elsewhere, Mexico’s peso fell 0.8%, with the South African rand down 0.6%. 

Investors are worried that Trump’s plans to slash taxes and raise tariffs, if elected, could stoke inflation and boost the case for the Federal Reserve to keep monetary policy restrictive for longer. The former president’s protectionist policies could also pose headwinds to the EM nation’s external finances, according to Sumitomo Mitsui Banking Corp.

“There’s a lot of caution in the market right now,” said Fiona Lim, senior currency strategist at Malayan Banking Bhd. “Trump’s policies are inflationary and a return of US economic outperformance and higher-for-longer US rates environment could potentially sink EM currencies once again.”

Emerging markets have benefited from rising odds of monetary easing across the globe as inflation showed signs of abating. The developing-world currency index is up about 1.5% from a five-month low hit in April, while a gauge of dollar-hedged local-currency bonds looks set for a third monthly advance.

All those gains could be at risk with traders mindful of the dollar’s dominance during Trump’s years in office, when currencies like the Chinese yuan and the Mexican peso came under pressure after he unleashed higher tariffs. 

“Trump’s policies are likely more protectionist against other countries and may cause headwinds to exporters,” said Jeff Ng, head of Asia macro strategy at Sumitomo. “This is particularly significant for Asian exporting nations. Risks to current-account balances may be detrimental to currencies.”

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