Emerging market assets down on recession fears; Sri Lankan bonds fall as president resigns

A gauge of emerging market currencies declined on Monday as the dollar surged to a 24-year-high on fears of a global recession, while Sri Lankan bonds dropped to record lows after the country's president and prime minister offered to resign following violent protests.

Prolonged instability in the island country may delay progress on negotiations with the International Monetary Fund for a bailout package, Sri Lanka's central bank governor told Reuters. Read full story

Sovereign dollar bonds issued by Sri Lanka US85227SAW61=TE, US85227SAR76=TE slipped between 1.5 cents and 2.3 cents to hit record lows on Monday.

MSCI's index of emerging market (EM) currencies .MIEM00000CUS slipped 0.2 per cent as the greenback surged to its strongest levels since late 1998. /FRX

"The environment will remain challenging for EMs - selling pressure on currencies will not ease, and you are likely to see more warning signals that economies are heading for a recession or stagflation," said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.

Stronger-than-expected US labour market data last week bolstered expectations the Federal Reserve will deliver another 75-basis-point rate hike later this month, a move that could worsen the outlook for battered EM assets.

Turkey's lira TRY= slipped 0.4 per cent after ratings agency Fitch downgraded the country's debt rating to "B" from "B+" on Friday, citing rising inflation and economic concerns.

Mexico's peso MXN= also suffered, skidding 0.4 per cent, after Moody's on Friday cut the Latin American country's credit rating by one notch on weak investment prospects.

Elsewhere, weakness in shares of China's tech giants and a resurgence in domestic Covid-19 cases pressured regional stocks, with the CSI300 index .CSI300 and Hang Seng index .HSI losing between 1.7per cent and 2.7per cent. EM stocks .MSICEF were down 1.4per cent.

Eastern and Central European currencies (CEE) also extended declines, with the Hungarian forint EURHUF= weakening to 408.31 per euro despite recent interest rate hikes. Worries about an energy supply crunch heightened as Nord Stream I, the biggest single pipeline carrying Russian gas to Germany, starts annual maintenance on Monday.

"Even though central banks in Central and Eastern Europe are raising interest rates, the rate hikes are not providing CEE currencies with sufficient support because of major concerns about inflation and a recession," Matys added.

Amid the risk-off, South Africa's rand ZAR= resumed its own downward trend from last week, falling 0.6per cent.