Emerging-Market Currencies Decline Following Strong US Jobs Report

US Jobs Report Boosts Dollar, Weighs on Emerging Markets

The US jobs report for May has dealt a blow to currencies in the developing world, as the strong labor market growth undercut the case for rate cuts from the Federal Reserve. The MSCI's emerging-market currency index hit a day's low following the report, and dropped to its lowest since early April.

Mexico's peso and South Africa's rand, two bellwether emerging market currencies, erased earlier advances. The strong US labor demand is supporting a more restrictive Fed policy stance, which in turn is bolstering the US dollar. The jobs report showed that US job growth topped all forecasts in May, with the unemployment rate holding steady at 4.3%. Nonfarm payrolls increased 172,000 last month after upward revisions to the prior two months, marking the strongest three-month advance in more than two years.

The figures boosted bets that the Federal Reserve will consider an interest-rate increase this year in order to contain inflation. However, India's rupee outperformed all its peers, rallying as much as 0.9% after the central bank and government unveiled a "bazooka" package to support the rupee after it plunged to a record low. This move was reminiscent of a 2013 taper tantrum-era playbook to spur foreign inflows.

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Emerging-market equities also slumped on Friday, extending a losing streak to a third day. Asian AI technology companies led losses, with Broadcom Inc.'s downbeat outlook for AI-chip sales earlier this week causing jitters among investors. Emerging market stocks and currencies are now on track for a weekly fall after two weeks of gains.

The risk assets were also pressured by the failure to make progress in talks over an interim peace deal this week between the US and Iran, with the sides seeing their worst clashes since an April ceasefire began and fighting continuing in Lebanon. Skirmishes continued overnight between Hezbollah and Israel in southern Lebanon after the Iran-backed group rejected a US-brokered proposal aimed at securing a broader truce.

Even so, Hezbollah's attacks on northern Israel have eased, while Israel has held off striking Beirut after threatening to do so earlier this week. Finally, Ukraine's dollar debt led bond-market gains ahead of weekend talks between President Volodymyr Zelenskyy and leaders from the UK, France and Germany to discuss negotiations to end the war with Russia.

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