Currency index hits all-time high in countdown to Fed rate verdict

Steady risk appetite propelled an emerging market currency index to a record high on Monday as investors were convinced that the U.S. Federal Reserve would deliver a big interest rate cut in a week marked by other key central bank policy decisions.

Rising for the fourth session, the MSCI index for EM currencies scaled a lifetime high, after logging its biggest one-day gain since Aug. 19 on Friday. The stocks gauge hit an over one-week high, rising for the third consecutive day.

While the U.S. Fed is all but certain to cut rates on Wednesday, the debate is over the size of the cut, with market bets inclining towards 50 basis points (bps), LSEG data showed. This follows last week's 25-bps cut by the European Central Bank.

"The Fed will deliver another cut in November and December but of 25 bps each. Focus would be on the dot plots and Powell's assessment of the economy. The 2024 dot plots will likely be lowered," said Mohit Kumar, chief economist for Europe at Jefferies.

Lower U.S. rates could give EM central banks more room for manoeuvre to ease themselves and support domestic growth, barring the volatility and uncertainty around the U.S. presidential election.

Latin America and emerging Europe have led the easing cycle that has already started in half of the emerging markets tracked by Reuters.

The Bank of England and Bank of Japan are some of the other prominent central banks to deliver policy decisions this week, with the yen hitting its highest levels in over a year.

The South African rand gained 0.7% against the dollar to an over one-week high, while the yield on the benchmark 2030 government bond slipped 4 bps. Investors also geared up for a local inflation print this week.

Hong Kong shares reversed early losses to close up, with investors assessing yet another batch of underwhelming economic data that bolstered the case for aggressive stimulus to shore up the economy and help it hit its annual growth target.

Mainland equity, bond and foreign exchange markets were closed for the mid-autumn festival break, set to resume trading on Wednesday.

Poland's blue-chip stock index lost nearly 2%, dragged by a 4% decline in insurer PZU due to concerns over the impact of severe flooding.

Among others, Sri Lankan and Indonesian stock markets were shut due to public holidays.

Major stock markets in the Gulf also rose ahead of the Fed decision, boosted by strong oil prices - a catalyst for Gulf financial markets. Monetary policy in the Gulf Cooperation Council often aligns with the Fed's decisions as most of the regional currencies are pegged to the U.S. dollar.

HIGHLIGHTS:

** S&P revises Saudi Arabia's outlook to positive on advancing non-oil economy

** Mexico's sweeping judicial overhaul formally takes effect

** Argentina's Milei pledges to protect fiscal balance in budget speech - Reuters