Emerging-Market Currencies Slide on Yuan Weakness, US Tariff Risks

AFRICAN STOCKS AND FINANCEDecember 11, 2024 at 2:55 PM UTC

TLDR

Emerging-market currencies dropped on Wednesday, with a key index posting its steepest one-day loss in over a week
The offshore yuan fell 0.5% to 7.2921 per dollar after reports suggested Beijing may let the currency weaken further in 2024 to counter potential US tariffs
The ripple effect of a weaker yuan could harm other emerging markets reliant on Chinese demand, as cheaper Chinese goods undercut competitors

Emerging-market currencies dropped on Wednesday, with a key index posting its steepest one-day loss in over a week. The offshore yuan fell 0.5% to 7.2921 per dollar after reports suggested Beijing may let the currency weaken further in 2024 to counter potential US tariffs under President-elect Donald Trump.

China’s monetary easing to support exports has pressured the yuan this quarter, risking capital outflows and financial instability. The ripple effect of a weaker yuan could harm other emerging markets reliant on Chinese demand, as cheaper Chinese goods undercut competitors. The correlation between China’s exchange rate and emerging-market currencies is at its highest since June.

Elsewhere, Brazil's Vice President Geraldo Alckmin returned to Brasilia as President Lula underwent emergency brain surgery. The central bank is expected to raise borrowing costs for a third time. In South Africa, slower-than-expected inflation growth could lead to interest rate cuts. MSCI’s emerging-market equity index fell, led by losses in Taiwan and China.

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Key Takeaways

China’s potential yuan devaluation to counter US tariffs signals broader risks for emerging markets tied to Chinese demand. While a weaker yuan could make Chinese exports more competitive, it raises the threat of capital outflows, destabilizing financial markets and undercutting exporters in other developing nations. This situation underscores the interconnected nature of emerging-market currencies and global trade policies. Policymakers in developing economies face limited options to mitigate these external risks, as US-China trade dynamics remain volatile. Additionally, divergent domestic conditions—such as Brazil’s political uncertainty and South Africa’s slowing inflation—complicate regional monetary strategies. Emerging markets will likely remain vulnerable to both global and local shocks as these dynamics play out.

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