Emerging Markets Trim Gains As US Threatens To Hike India Tariff

Currencies and stocks in developing economies trimmed gains after US President Donald Trump threatened to hike tariffs on India even above the punitive rate announced last week.

MSCI’s EM currency gauge came off session highs to rise 0.4%, while the stock index pared gains to 0.9%. 

Trump’s latest tariff threat is denting risk sentiment on a positive day for emerging markets. The currency gauge is still set for its biggest gain in over a month and equities snapped a two-day losing streak as traders bet on increasing odds of a Federal Reserve rate cut in the coming months. The Bloomberg Dollar Spot Index edged lower.

"For those who thought that Trump might reconsider his tariff strategy once the negative impacts on the US economy became visible, are now being proved wrong," Thu Lan Nguyen, the head of FX and commodity research at Commerzbank AG, said in a note. "Instead of facing reality, the US president apparently prefers sweeping the problem under the rug."

The $10-billion iShares MSCI India ETF fell to a session low, dropping as much as 0.6% after Trump said he would be "substantially raising" the tariff on Indian exports to the US because of New Delhi’s purchases of Russian oil. Trump’s post didn’t specify how much he would raise the levy by. He announced a 25% rate on Indian exports last week.

Trump said he’ll announce a new Fed governor in the coming days in a move that may bring in a policymaker more closely aligned with his preference for lower rates. That space opened up after Adriana Kugler announced Friday that she would vacate her board of governors seat, which wasn’t due to expire until January.

Trump will also announce the replacement for the Bureau of Labor Statistics’ head in a move that is seen as potentially undermining the credibility of the institution’s data.

The Philippine peso and Thai baht were the best performers among peers with gains of about 1% against the dollar. Most other Asian FX markets also gained versus the greenback, with Goldman Sachs strategists expecting the South Korean won and Taiwanese dollar to outperform other EM currencies in the region.

“If the Fed resumes rate cuts in September and signals a more dovish policy stance, it could potentially offer support to Asian currencies,” MUFG Bank’s currency strategist Lloyd Chan wrote in a note. Risks for regional FX might come from the implementation of higher US tariffs that could weigh on exports, he added.

Colombia’s dollar bonds were among the best performers in emerging markets Monday after the government announced it would buy back some of its outstanding global notes with cash in an effort to revamp its financing strategy amid concerns over its widening budget deficit.