Dollar rise cancels out boost from N.Korea relief

London (Aug 15)  A stronger dollar weighed on emerging assets on Tuesday, with stocks and currencies failing to benefit from an easing of the North Korea standoff.

Having hit a one-month low last week amid a bellicose exchange of words between U.S. President Donald Trump and North Korean leader Kim Jong Un, MSCI's benchmark emerging equity index trod water following a more than 1 percent jump on Monday.

Overall, global markets traded a touch higher following Kim's decision to delay firing missiles towards Guam while he waits to see what the United States does next. Adding to the mood were comments from South Korea's president saying Seoul would seek to prevent war by all means. But the gains failed to boost riskier emerging market stocks as the dollar index extended gains for a second day, with higher U.S. yields giving the greenback a lift.

However, emerging dollar bond yield spreads narrowed another 2 basis points, nearly trading back at levels last seen a week ago before Trump rattled markets with his "fire and fury" threat to Pyongyang.

Shahzad Hasan, portfolio manager for emerging markets fixed income at Allianz Global Investors, said the overall backdrop for emerging markets was "positive right now":

"Risk is back on, fears of conflict with North Korea are receding, emerging market spreads are tighter."

A stronger dollar also weighed on some emerging currencies.

Mexico's peso weakened 0.2 percent against the greenback, with Turkey's lira nearly matching the fall.

Yet oil prices broadly stabilizing after Monday's tumble and copper futures snapping a four-day losing streak provided some support, with Russia's rouble strengthening 0.1 percent. In South Africa, the rand struggled 0.1 percent higher after the high court quashed an anti-graft watchdog's proposal to change the central bank's mandate. The watchdog's report, published in June, had called on lawmakers to amend South Africa's constitution to relax the central bank's inflation-targeting mandate.

It had rattled investors, who feared a change could undermine the bank's role in keeping the financial system stable at a time when the economy has sunk into recession, the country's credit rating has been downgraded and its politics are dominated by questions over President Jacob Zuma's stewardship.

Reuters