Dovish Federal Reserve good for emerging markets

By Y-Sing Liau and Natasha Doff
It’s been at least 18 years since emerging-market currencies had it this good as the Federal Reserve adopted a gradual approach to its rate-increase cycle, fueling optimism that capital inflows can be sustained.

A Bloomberg gauge of 20 currencies gained for a fourth day after Fed Chair Janet Yellen said policy makers would act "cautiously" as they look to raise rates. Stocks rallied, sending shares in Shanghai up the most in a month, while South African equities rebounded from a two-week low and Russia snapped the longest run of losses since 2011. The premium investors demand to hold emerging market debt dropped from the highest since March 16.



"Yellen’s comments were pretty aggressive and make it clear that rate hike expectations might as well be scratched out for this year," said Nathan Griffiths, a senior emerging-market equities manager at NN Investment Partners in The Hague. "This is the perfect backdrop for emerging markets to continue" the rally because positioning remains geared to a rising dollar, he said.

Brazil, South Africa, Russia and Turkey will probably benefit most from a weaker dollar, Griffiths said.

Developing-nation assets have advanced this month after the Fed reined in forecasts for higher rates amid concern over turmoil in global markets. While Yellen reasserted that stance, hawkish comments from Fed officials last week had spurred traders to raise bets for rate increases this year.