Fed outlook hits EM assets as stocks fall, FX at four-month low
EM central bankers rush to shore up currencies
Czech central bank expected to hold rates
EM stocks down 1.2%, FX down 0.4%
By Lisa Pauline Mattackal
Dec 19 (Reuters) -Emerging market assets dropped on Thursday after investors were jolted by the U.S. Federal Reserve's signals of fewer rate cuts next year, with global stocks falling and the dollar rising against most EM currencies.
As expected, the Fed trimmed borrowing costs on Wednesday by 25 basis points. However, Federal Reserve Chair Jerome Powell said more reductions hinge on further progress in lowering stubborn inflation.
Fed policymakers' projections show they now expect just two quarter-percentage-point rate reductions by the end of 2025.
The changed outlook hit emerging market assets as the dollar and U.S. Treasury yields rose. MSCI's emerging markets currency index .MIEM00000CUS dropped 0.4% at 0930 GMT to its lowest level since August.
"The pace of the selling in USTs has been a massive green light for FX traders to re-engage with USD longs, and they have done so liberally, with EM FX being carved up," said Chris Weston, head of research at Pepperstone.
The Czech crown EURCZK= was little changed against the euro ahead of its central bank policy announcement later in the day, where policymakers are expected to pause a one-year easing drive and keep rates at 4%.
Hungary's forint EURHUF= dipped 0.4% against the euro, set for a third session of declines though it rose 0.5% against the dollar after steep losses on Wednesday.
An index of EM stocks .MSCIEF dropped 1.2%, on course for its worst day in over one month. Benchmark indexes in Greece .ATG, Poland .WIG20, Turkey .XU100 and South Africa .JTOPI fell between 0.3% and 1.2%.
The change in the Fed's outlook will be a hurdle for emerging markets next year, with higher rates denting the appeal of riskier EM assets and the dollar's rise likely to drive foreign capital out of their markets and weigh on currencies.
It also further complicates the picture for EM central bankers. The Philippine central bank cut rates as expected, Taiwan kept rates on hold, while Mexico's central bank is expected to cut by 25 basis points later in the day.
The FX declines sent EM central bankers rushing to prop up their currencies, with central banks in Brazil and India selling dollars, while officials in Indonesia and Thailand said they would act to prevent excessive volatility.
Dollar bonds for riskier emerging economies also came under pressure, with dollar bonds in Nigeria, Egypt and Kenya down around 2 cents on the dollar.
"Initially people had priced aggressive rate cuts from the Fed ... they now expect a more measured approach," said a trader with a Kenyan commercial lender.
Turkey's lira TRYTOM=D3 extended its fall past 35 per dollar touched Wednesday.
Russia's rouble firmed 1.3% against the dollar RUB= after Russian President Vladimir Putin said the economy may grow by 4% this year but flagged rising inflation.
South Africa's rand ZAR=D3 traded 0.4% higher against the dollar.
HIGHLIGHTS:
** U.S. tariffs would hit Hungary's growth, boost inflation, central bank says
** China expected to leave lending benchmarks unchanged amid rate risks
For TOP NEWS across emerging markets nTOPEMRG
For CENTRAL EUROPE market report, see CEE/
For TURKISH market report, see .IS
For RUSSIAN market report, see RU/RUB
For GRAPHIC on emerging market FX performance in 2024 http://tmsnrt.rs/2egbfVh
For GRAPHIC on MSCI emerging index performance in 2024 https://tmsnrt.rs/2OusNdX
Reporting by Lisa Mattackal in Bengaluru; Editing by Shounak Dasgupta
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