The twin threats of rising US interest rates and a global recession are sending traders racing to the safety of the dollar, which is why the emerging-market currencies are tumbling.
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The MSCI Emerging Markets Currency Index dropped for the second day, extending this year's slide to 4.4%, heading for the steepest annual drop since 2015. The Philippine peso led declines in Asian trade, falling to the lowest level in 17 years, while the South Korean won fell to the weakest since 2009, as it fell to the lowest level since 2009. The Russian ruble sank more than 6% in European trade.
The slump in Asia followed the losses in other EM regions Tuesday when a surge in the dollar saw the Colombian peso fall by 2% to a new record.
In a research note, Win Thin, global head of currency strategy at Brown Brothers Harriman Co. in New York, wrote that emerging markets will suffer in the current environment of either higher developed-market rates or weaker global growth. It's bad for EM, no matter how things turn out. All of the major emerging-market currencies tracked by Bloomberg have weakened over the past month, as the Federal Reserve raised its benchmark rate by 125 basis points at its latest two meetings. Chair Jerome Powell said the central bank could hike by 50 basis points or 75 basis points at its July gathering.
Even if regional central banks step up the pace of tightening, Asian currencies remain vulnerable, according to Wee Khoon Chong, senior market strategist at the Bank of New York Mellon in Hong Kong, wrote in a research note Wednesday.
The odds of a US recession in the next year have gone up to 38%, according to a forecast from Bloomberg Economics.
The environment is not very forgiving for EMs, said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. An improvement in the global-growth outlook will be needed to turn the sentiment on the dollar, which may only come next year.