An index tracking emerging-market currencies closed for its worst session since November 2024 as the dollar jumped and traders dumped risk assets amid risks of a prolonged military conflict in the Middle East.
An MSCI total return gauge of developing nation currencies fell 0.5%, trimming earlier losses, while the US dollar and gold rose as investors piled into haven assets. Central banks in Indonesia, Turkey and India had to intervene in foreign-exchange markets to keep their currencies from sliding. Traders curbed bets on interest rate cuts in eastern Europe due to a spike in oil and natural gas prices.
The Hungarian forint fell the most among peers. The Polish zloty also fell, as fears around disruption in oil trading sent energy prices soaring.
Crude jumped some 9% in London trading as Iran all-but closed the critical Strait of Hormuz chokepoint to tanker traffic. Weekend attacks on Iran reverberated across the Middle East. Blasts were heard across Israel, Saudi Arabia, Qatar and the United Arab Emirates on Monday as states intercepted Iranian missiles launched in response to US-Israeli strikes.
“Markets are in a classic risk-off mode and bracing for the broader geopolitical fallout,” Elias Haddad, global head of markets strategy at Brown Brothers Harriman, wrote in a note on Monday. “Unsurprisingly, currencies of net oil-importing countries are underperforming while those of net oil exporters are holding up better.”
Higher oil prices pushed the Colombian peso higher at the end of Bogota trading, making it the main outlier in emerging markets. In Latin America, the most vulnerable currency was the Chilean peso, while in Asia, the Indonesian rupiah, the South Korean won and the Thai baht were exposed, according to Wells Fargo emerging markets macro strategist Alvaro Vivanco.
The US dollar rallied Monday as President Donald Trump said Iran attacks may last weeks. The greenback touched its highest levels since May before paring the advance. US manufacturing expanded in February but input prices soared at the fastest pace since 2022, stoking inflation fears. Traders are now fully pricing in a first Federal Reserve rate cut for September, with bets on a third reduction in 2026 almost evaporating.
Airlines suspended flights across the Middle East, causing major disruptions at some of the world’s busiest airports. Stock markets in Dubai and Abu Dhabi were shut amid concern over retaliatory attacks by Iran.
The spillover from tensions led JPMorgan Chase & Co. to slash its overweight recommendation on emerging markets currencies and local bonds in half.
“This is a shock that pushes EM weaker,” said Brendan McKenna, an emerging-market strategist at Wells Fargo in New York. “That shock, combined with the theme that EM is overvalued and overowned at current levels, should drive a selloff in the early days of the conflict.”
Trump said the US would keep up its military offensive against Iran for as long as it takes. The United Arab Emirates and Qatar have already begun lobbying allies to help them persuade the US president to keep military operations against Iran short.
“Fixed income and currency markets have been relatively resilient,” Polina Kurdyavko, head of emerging markets and senior portfolio manager at RBC BlueBay in London, wrote in a note. “Price action remains fluid and we have already seen some partial retracement as investors assess the low probability of a sustained closure of the Strait or a prolonged full-scale regional war.”
Monday’s selloff disrupted a record-busting rally across emerging markets, which was fueled by global asset managers redirecting flows from the dollar toward developing nations that offer higher yields or produce critical minerals for the booming AI sector.
Equities in the developing world dropped 1.5%, the most in a month. Tech heavyweights led the move lower, and the consumer discretionary sector was also hit. Korean markets, featuring some of the biggest emerging-market companies, were closed for a holiday.
East European bourses recouped some losses after dropping as much as 3%. Oil refiners helped to offset losses. The attack on Iran lifted energy, shipping, defense and gold shares.
Pakistan stocks plunged the most on record, triggering an hour-long trading halt, as the country’s conflict with Afghanistan added to risks.
The dollar-denominated bonds of Middle Eastern countries such as Egypt, Saudi Arabia and Bahrain dropped the most among EM peers, while the Israeli shekel and stocks listed in Tel Aviv gained.
The yields of local-currency bonds issued by countries that import oil rose. Investors bet that higher energy costs would feed into inflation and delay rate cuts.
“A sustained increase in oil prices would also significantly limit the scope for policy rate cuts due to an external inflationary shock,” Barclays strategists including Marek Raczko wrote in a note. “So, front-end rates in economies that are in an easing cycle — South Africa, Poland, Turkey, Hungary — or where the market discounts further cuts — Czechia — should reprice higher.”
Countries with low currency reserves, such as Argentina, Sri Lanka, Pakistan and Turkey, face stronger risks of capital outflows and currency depreciation, strategists at Citigroup Inc. said.
“Frontier spaces look particularly vulnerable,” Luis Costa wrote in the note.
EM stocks and currencies remain up for the year, and the war’s impact depends mostly on how long the disruption in oil trade lasts, said Pedro Quintanilla-Dieck, a strategist at UBS.
“A US attack on Iran was not entirely unexpected,” he said. “Most likely, any disruption to the global energy supply is likely to be brief. In this scenario, markets may be volatile in the coming weeks, but would likely refocus on positive global economic fundamentals, thereafter. That being said, a prolonged disruption to energy supplies could have a more significant impact on the global economy.”
Bloomberg Economics said the conflict could lead to an increase in oil prices to as high as $108 per barrel, especially if the confrontation proved longer and “more intense than the 12-day war in June,” analysts led by Dina Esfandiary wrote.
Written by: Nicolle Yapur, Andras Gergely, and Prima Wirayani — With assistance from Matthew Burgess, Kerim Karakaya, Joanna Ossinger, Beril Akman, and Carolina Wilson @Bloomberg
The post “Emerging Currencies See Worst Day Since 2024 on Middle East Risk” first appeared on Bloomberg
