Emerging Currencies Decline Amid Market Uncertainty Stemming from Iran Conflict Fears

Emerging-Market Currencies Weaken Amid US-Iran Tensions

The global financial markets experienced a mixed day on Tuesday, as emerging-market currencies weakened in response to overnight clashes near the Strait of Hormuz, despite signs of progress toward a US-Iran peace deal. The MSCI's EMFX gauge was little changed overall, but most developing-world currencies fell, with South Africa's rand being among the worst performers.

The rand's decline can be attributed to its status as a benchmark for risk appetite due to its strong liquidity. The recent military action highlighted the ongoing tension between the US and Iran, hours after US President Donald Trump said negotiations with Tehran to extend their ceasefire and reopen the strait are proceeding. Secretary of State Marco Rubio added that a deal would likely take a few days to finalize.

In contrast, emerging-market stocks rose on optimism around artificial intelligence, with the index climbing for a fourth day, rising 0.5%. Asian shares led the way, with South Korea's Kospi index jumping about 2.6% to a record, and Hong Kong stocks advancing as markets reopened after Monday's holiday. Taiwan overtook India in stock market value, driven by a rally in Taiwan Semiconductor Manufacturing Co. and growing AI optimism.

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According to Karen Ward, JPMorgan Asset Management's EMEA chief market strategist, global investors are focused beyond the current geopolitical concerns on the investment opportunities that may come from increased public, military, and corporate spending across the world.

The continued rise in Asian shares after a long weekend in several markets came despite uncertainty over the next phase in US-Iran talks. The mounting inflation pressures fueled by the Iran war spurred Sri Lanka's central bank to raise its benchmark rate by a full percentage point — its first monetary tightening in three years.

Meanwhile, Hungary's central bank decided to maintain the benchmark rate at 6.25% in a split decision. In debt markets, the Federation of Bosnia and Herzegovina mandated banks for a roadshow, with a potential benchmark 5-year euro-denominated benchmark sale to follow.

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In Africa, Senegal's dollar-denominated bonds fell as investors weighed the appointment of an ex-central banker as prime minister amid a deepening political standoff. Elsewhere, Bolivian sovereign bonds are in free-fall, dropping for a 10th day, as protests and road blockades choke off essential supplies to La Paz and lead to violent clashes.