Dollar surge pressures emerging markets

Emerging-market assets came under pressure as investors moved towards the dollar, cutting exposure to riskier currencies and equities before the Federal Reserve’s policy decision and amid rising doubts over artificial intelligence spending and stalled Middle East peace efforts.

MSCI’s emerging-market currency gauge fell 0.3 per cent, with most major developing-economy currencies weakening against the greenback. The Philippine peso, the rupee and the Thai baht led declines, reflecting the strain on Asian foreign-exchange markets from higher oil prices, equity outflows and a firmer US currency. A companion index of developing-market shares dropped 0.8 per cent, dragged lower by technology counters after a wider sell-off in AI-linked stocks.

The shift marked a retreat from stronger conditions earlier in the month, when lower US rate-cut expectations had been partly offset by optimism over technology demand and resilient capital flows into selected markets. That balance has now become more fragile as investors reassess the scale and timing of returns from artificial intelligence investment, particularly after fresh questions emerged over whether heavy spending on computing capacity can translate quickly into revenue growth.

Weakness in US technology shares set the tone. The S&P 500 fell 0.5 per cent, while the Nasdaq Composite lost 0.9 per cent, with declines concentrated among companies tied to AI infrastructure and semiconductor demand. Nvidia, Oracle and Broadcom came under pressure as investors trimmed exposure before results from Microsoft, Alphabet, Amazon and Meta, which are expected to provide a clearer measure of whether AI-related capital expenditure remains commercially justified.

Oil added a second source of pressure. Brent crude traded above $110 a barrel as peace efforts in the Middle East failed to ease concerns over supply disruption, shipping risks and inflation. Higher energy prices are particularly difficult for oil-importing emerging economies, where current-account balances, inflation expectations and fiscal positions can deteriorate quickly when crude costs rise. For Asia, the combination of dollar strength and elevated oil prices has renewed concern over imported inflation and external funding needs.

The dollar’s advance reflected both safe-haven demand and expectations that the Federal Reserve will keep interest rates unchanged. Markets broadly expect the US central bank to hold the federal funds target range at 3.5 per cent to 3.75 per cent, with attention focused on how strongly policymakers push back against rate-cut expectations. Any signal that energy-driven inflation risks could delay easing would further support the dollar and keep pressure on emerging-market currencies.

Jerome Powell’s remarks will be closely watched because the meeting comes against a more complicated policy backdrop. Inflation remains above the Federal Reserve’s target, oil prices have climbed sharply since the escalation in the Middle East, and labour-market indicators have softened without showing a decisive downturn. That combination makes it harder for policymakers to justify swift rate cuts, even as tighter financial conditions weigh on global growth.

Equity markets across developing economies showed uneven performance. Technology-heavy markets in North Asia were among the weakest, with chip-related shares in Taiwan bearing the brunt of the reassessment of AI valuations. Southeast Asian currencies also weakened as traders reduced carry positions. Latin American currencies performed better, with the Colombian peso and Chilean peso outperforming peers, supported by commodity exposure and local market dynamics.

The rupee remained vulnerable as oil-related dollar demand, equity outflows and speculative long-dollar positioning limited its ability to stabilise. Exporter dollar sales remained subdued, adding to the imbalance between demand and supply in the local currency market. Bond markets also faced pressure as higher crude prices raised concern over inflation and fiscal strain.

For emerging-market investors, the latest move underscores how quickly gains can unwind when several global risks converge. A stronger dollar tends to tighten financial conditions by raising the cost of servicing dollar-denominated debt, reducing the appeal of local-currency bonds and drawing capital back towards US assets. Higher oil prices add a second drag for energy importers, while technology-sector weakness weighs on equity benchmarks that had benefited from AI optimism.