Fed minutes weigh on risk appetite; Turkey central bank eyed

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* EM FX set for worst session in two months

* Fed to keep hiking interest rates – minutes

* Egypt may have to let pound fall to 25/$ – economist

* Turkish central seen holding rates at 14%

Aug 18 (Reuters) – Emerging market stocks and currencies
fell on Thursday after minutes of the Federal Reserve’s last
meeting signalled more U.S. interest rate hikes, while investors
in Turkey’s lira awaited a central bank policy decision.

MSCI’s index of emerging market stocks fell 0.6%,
set for their worst session in two weeks, while its currencies
counterpart was on course for its steepest
one-day fall in two months as the dollar got a small boost from
the Fed minutes.

After two 75 basis point rate hikes this year, the Fed
tempered expectations for another large increase in September,
but members saw the need to keep cooling inflation, the minutes
showed. Traders now see a slightly higher chance of a 50 bps
hike next month.

“We maintain our expectations for another 100bps in hikes
(by the Fed) by year-end, with risks to the upside if inflation
does not slow in line with our forecasts,” said Mark Haefele,
chief investment officer, UBS Global Wealth Management.

High U.S. borrowing costs increase the appeal of the dollar
and U.S. bonds, and tend to divert capital flows from riskier
assets. This has led to several currency crises in emerging
markets in the past.

Some gains in central and eastern European shares helped cap
losses in the broader emerging markets index, with Hungarian
shares recovering 0.2% after declining 1.3% on Wednesday
on worries about a slowdown in economic growth.

CENTRAL BANKS STRIVE

In Egypt, government bonds extended
declines set-off by the abrupt resignation central bank chief
Tarek Amer on Wednesday.

The Egyptian pound is down about 18% this year. On
Thursday, the central bank is seen hiking rates by 50 bps to
11.75%.

But Capital Economics says the next governor may have to let
the currency fall further to 25 per dollar by end-2024 from
around 19 currently.

Turkey’s struggling lira held steady, just inches
away from December record lows. The country’s central bank is
seen holding the key interest rate at 14% despite inflation
surging to nearly 80%.

The Philippine peso was a rare gainer among emerging
market currencies on Thursday, up 0.2% after the central bank
hiked by 50 bps to 3.75%, as expected, and left the door open
for more.

Meanwhile, ratings agency Fitch on Wednesday upgraded
Ukraine’s rating to ‘CC’ from ‘Restricted Default’ following the
country’s restructuring of external debt last week.

For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh
For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX