(Bloomberg) -- Emerging-market assets fell after US data showed business activity rising at the fastest pace in two years, fueling bets that the Federal Reserve will keep rates higher for longer. 

MSCI Inc.’s EM currency index fell less than 0.1% Thursday amid a spike in US Treasury yields after the purchasing managers index topped all estimates, sparking a risk-off mood across global markets. Emerging stocks dipped 0.4%, also dragged lower by Chinese equities as investors bet a rally in the $9.3 trillion market has run its course and stronger stimulus is needed to catalyze further gains.

Read more: US Business Activity Expands Most in Two Years, Prices Pick Up

“The strong PMIs bring the US outperformance story back to the fore front,” said Win Thin, managing director and global head of markets strategy at Brown Brothers Harriman & Co. “Coupled with the hawkish FOMC minutes, it’s clear the Fed won’t be cutting rates anytime soon and that’s helping the dollar gain more traction.” 

The FOMC minutes, released Wednesday, showed that some policymakers expressed willingness to tighten monetary policy if needed. 

Swaps now fully price in a full quarter-point rate cut in the US in December, versus November a day earlier. After stronger economic data and bets that the Fed will keep a tight grip on interest rates, Thin said he expects to see some catchup in the dollar’s strength in the coming days.

South Africa’s rand, often seen as a proxy for broader EM risk, dropped 1.2%. In Latin America, currencies from Mexico and Colombia led losses on the back of a higher dollar and declining metals prices. The Mexican economy reported weak growth at the start of the year while inflation sped up further above target, showing that the nation has been losing momentum amid weakening demand for its exports and the effects of bad weather on agriculture.

In stocks, Alibaba Group Holding Ltd. dragged the broader index tracking emerging-market equities lower after announcing plans to raise $5 billion by selling convertible bonds. The e-commerce giant needs capital to invest in its core businesses of commerce and the cloud, both of which have bled market share during a crackdown on the sector by Chinese authorities and subsequent internal turmoil.

Chinese stocks fell and were on course for a weekly underperformance relative to developing-nation peers as investors bet the recent rally was set to peter out.

Benchmark gauges of Chinese mainland stocks, Hong Kong-listed shares and technology equities declined, in a selloff that traders blamed on “profit-taking.” Losses in Chinese technology stocks overshadowed advances in Taiwanese and Korean semiconductor companies, which extended gains on the back of Nvidia Inc.’s better-than-forecast results. 

“We believe the AI growth story remains solid and that the rally has more room to run,” Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management, wrote in a note, adding that investors could diversify their portfolios by adding exposure to Asian AI-related companies given the “still lengthy AI-chip back-orders.”

EM investors are also focusing on political risks as countries from South Africa to India and Mexico choose their next governments in the coming days. Wall Street investors are signaling that South African assets can rally after next week’s election as they favor a coalition headed by the ruling African National Congress, which might ensure policy continuity.

--With assistance from Abhishek Vishnoi.

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