Currencies Jump on Weak Dollar and U.S. Stimulus Outlook

Dec 17 (Reuters) – Emerging market currencies and stocks firmed on Thursday, with the South African rand hitting a 10-month high, as growing signs of a bumper U.S. stimulus package dented the dollar’s appeal.

Democrats and Republicans sounded more positive over a $900 billion COVID-19 aid bill while the Federal Reserve said it would keep pouring cash into financial markets through its bond buying programmes until the U.S. economy was on a more sound trajectory.

MSCI’s index for emerging market currencies rose 0.2% and hovered near their highest in more than 2-1/2 years as the risk-on mood weakened the dollar.

“We expect to see an extension in the dollar weakness going ahead on further quantitative easing from the U.S. Fed which will support emerging market currencies going forward,” said Cristian Maggio, head of emerging markets strategy at TD Securities.

“But we expect to see some drawback towards the end of the year as a lot of liquidity is generally pulled out of the table,” he warned.

The South African rand jumped 0.5% to its highest since February, supported by the Federal Reserve’s word to keep interest rates low, while the country’s benchmark stock index surged to its all time high.

Lower interest rates in the United States typically lift demand for higher-yielding assets in emerging markets.

Russia’s rouble rose 0.4% ahead of President Vladimir Putin’s annual news conference while a jump in oil prices on stimulus cheer supported the currency of the world’s second largest oil exporter.

The Turkish lira strengthened against the dollar for the fifth consecutive session after its central bank vowed to pursue a tight monetary policy.

But keeping optimism in check, Turkey’s government said it planned to take reciprocal steps following U.S. sanctions imposed for its purchase of Russian S-400 missiles.

Most central European currencies gained against the euro, with the Czech koruna gaining the most as its central bank is expected to leave rates unchanged later in the day.

An index of emerging market stocks gained 0.5% to hit its highest in almost two years. Buoyed by vaccine and stimulus optimism, the index is well above its pre-pandemic levels, trading just about 5% shy of its record high hit in 2007.

(Reporting by Shashank Nayar in Bengaluru; Editing by Edmund Blair)

Source: Reuters

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