Forint Falls as Oil Prices Rise and Fed Decision Looms

Central European currencies took a hit yesterday as Hungary's forint led the pack down. The forint fell by 0.47% to 361.30 per euro, following a jump in oil prices and heightened geopolitical tensions. A trader in Budapest pointed out that markets had steadied when it seemed like the Strait of Hormuz might remain open, but weakened when Iran rejected a proposal relayed via Oman and oil prices rose.

Higher oil prices often push investors towards the US dollar and away from emerging-market currencies, especially when there's perceived geopolitical risk. With the Federal Reserve's rate decision looming at 1800 GMT, markets were on edge. The CME FedWatch tool indicated a 32% chance of a 25-basis-point hike and a 68% chance of no change, which ING described as 'asymmetric'. A surprise hike would typically strengthen the dollar and hit Central and Eastern Europe currencies harder, while an on-hold decision may only give a smaller bounce.

The region's more volatile currencies often move first and most in times of de-risking. As US rates look set to stay higher, borrowing dollars can get more expensive, making 'carry' trades less attractive. In this case, the forint's 0.47% slide was bigger than Poland's zloty drop of 0.12% and the Czech crown dip of 0.07%. The effects may not be limited to spot prices either, as demand for currency hedges can rise around binary events like a Fed decision.