Federal Reserve interest rate expectations and a strong U.S. dollar are wreaking havoc on the emerging markets and related exchange traded funds.
ETFs that track the emerging markets, notably those that cover Brazil, emerging currencies and developing market debt, touched fresh all-time lows Tuesday, including the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), WisdomTree Emerging Currency Strategy Fund (NYSEArca: CEW) and SPDR Barclays Emerging Markets Local Bond ETF (NYSEArca: EBND).
Emerging market equities have been pummeled over the past week, with the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) down 3.9% and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) 4.2% lower.
Weighing on the emerging markets space, the U.S. dollar has been slowly appreciating against a basket of foreign currencies on the prospect of a higher U.S. interest rate, reports Patti Domm for CNBC.
“Emerging markets have generally required four things: one, a weak dollar; second, strong commodities prices; third, strong world growth; and the fourth thing is about Fed policy,” Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman, said in the article.
However, the world economy has been slowing, commodity prices have declined, the USD is only at the start of its strengthening cycle and the Fed is thinking about tightening its monetary policy. [Mind Your Global ETF’s Currency Exposure]