Looming U.S. Rates Increase Puts 'Fragile Five' in Vulnerable Position Again

Brazil’s real, Indonesia’s rupiah, South Africa’s rand, Turkey’s lira and India’s rupee, referred to as the “fragile five” by Morgan Stanley, are in a vulnerable position again as the U.S. prepares to lift interest rates, reports Bloomberg.

Morgan Stanley coined the phrase “fragile five” in August 2013 to describe the currencies, which are particularly vulnerable because of their dependence on foreign investment to fund current-account deficits, according to Bloomberg.

Data compiled by Bloomberg show that the "fragile five" has jumped to the highest level in almost five months. However, those gains have slowed as the U.S. reported consistent economic growth in recent months.

Bloomberg notes that "with the Fed on track to end its extraordinary stimulus program in October, investors are starting to consider the effects of the first U.S. rate increase in eight years on emerging-market currencies."

According to Bloomberg, the cost to insure against declines in the five currencies versus the U.S. dollar is on the rise.  

“There’s more demand for insurance against the dollar’s appreciation,” Bipan Rai, director of foreign-exchange strategy at CIBC World Markets Inc., told Bloomberg. “A lot of those emerging-market currencies are vulnerable because a lot of them look overbought, or have been over the last seven or eight months.”   

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