Emerging-market currencies hit record high as traders dial back Fed rate hike expectations

Emerging-market currencies just did something they haven’t done since January: set a new record. The MSCI Emerging Market Currency Index climbed to an all-time high on August 6, ticking up 0.1% intraday as traders recalibrated their expectations for what the Federal Reserve will do next. The catalyst was straightforward. July’s producer price index came in flat, showing no change, and the market read that as one more data point suggesting the Fed can afford to sit on its hands. The carry trade, which involves borrowing in low-yielding currencies to invest in higher-yielding ones, suddenly looked a lot more attractive. The Fed math that moved the needle Fed funds futures told the story in real time. After the PPI release, the implied probability of a September rate hike dropped to 35%. That’s down from 40% just a day earlier and 55% a week before that. In the span of seven days, the market effectively cut the odds of a near-term hike by more than a third. The Fed held its target rate at 3.50% to 3.75% during the July FOMC meeting, even as year-over-year inflation sat at 3.4%. Some committee members reportedly pushed for tighter policy, but the majority held the line. New Fed Chair K...