Fed's inflation lead investors fight, slowing China to dump EM assets

Once optimistic, now disappointed investors are dumping Asian, African, Latin American assets

- Chelsey Dulaney

Rising U.S. interest rates and China's economic sluggishness are dealing a double blow to emerging markets.

Investors had expected developing economies from Brazil to Thailand to shine this year as U.S. interest rates fell, the dollar weakened and Chinese demand rebounded after three years of pandemic-driven lockdowns.

Instead, the reverse happened: The Federal Reserve kept raising U.S. interest rates to slow inflation, driving the dollar higher. Separately, China's recovery faded amid fears its economy is entering an era of slower growth. Disappointed investors are now dumping assets across the developing world.

The retrenchment underscores the risks still looming over the global economy this year even as some central banks wind down their aggressive inflation-fighting campaigns. Investors are recognizing that U.S. interest rates will likely stay higher for longer than they expected, a shift that sent Treasury yields to their highest levels in nearly 16 years this month.

While Fed Chair Jerome Powell on Friday argued for holding rates steady for now, he kept the door open to raising them later this year if the U.S. economy doesn't slow enough to keep inflation declining.

U.S. borrowing costs and the dollar are the backbone of global financing markets, and their fluctuations have far-reaching effects.