London - Emerging markets mostly fell on Thursday after the US Federal Reserve set the clock ticking on its first interest rate rise in almost a decade, with a surging dollar taking an especially heavy toll on currencies.
Russia, hurt by its own domestic woes, continued its run as the worst performing market, with the currency falling to a record low against the dollar.
The greenback firmed after the Fed ended its six-year long asset purchase programme and signalled its first interest rate rise since 2006 would come in 2015.
That pushed most emerging assets lower, with MSCI's emerging equity index falling 0.6 percent off three-week highs.
Gulf bourses fell 1-2 percent.
Some markets bucked the trend, with Chinese mainland stocks touching 20-month highs on reform hopes and India at new record highs, led by shares in software exporters who are expected to benefit from a US economic recovery .
But the rupee fell to two-week lows while other Asian currencies such as Malaysian ringgit and Korean won lost around 0.5 percent to the dollar.
The Turkish lira and South African rand slipped off six-week highs.
“This is a market that is in digestion mode after the Fed, we see a bit of weakness after the dollar ticking higher,” said Benoit Anne, head of emerging markets strategy at Societe Generale in London.
But he is advising clients to disregard the weakness in emerging currencies, arguing that lower oil prices and US recovery would benefit many markets such as South Africa.
“The bigger picture has actually not changed,” he added.
The rouble fell to fresh record lows, with some investors speculating the central bank will announce a move to a free-float regime on Friday.
An interest rate rise is more likely but forwards markets show even this may be ineffective.
While the rouble weakened 0.7 percent in the spot market, it fell 1.6 percent to the dollar in the six-month non-deliverable forwards market indicating an almost 5 percent depreciation over this period.
Most analysts predict a 50-75 basis point rate rise though interest rate swaps and cross-currency swaps expect a more aggressive 150-250 bps move.
Societe Generale reckons on a 50 bps hike, explaining that the central bank sees this as sufficient to tame inflation expectations.
“If this scenario does materialise, investors will believe - wrongly - that the central bank has chickened out, which will result in an even weaker rouble,” Anne said.
Brazil's central bank meanwhile shocked markets with a quarter point rate rise, soon after leftwing President Dilma Rousseff disappointed investors by regaining the presidency.
“This looks like the “credibility hike” that the market would have expected should the opposition have won the presidential election on Sunday,” Deutsche Bank analysts said.
“We believe the much faster-than-expected adjustment in interest rates is positive for market sentiment (as it strongly signals austerity), and could contribute to a reduction in the total size of the tightening cycle,” they added. - Reuters