Emerging-market currencies retreated with stocks as China weakened the yuan’s fixing and on speculation the Federal Reserve will signal its willingness to raise U.S. interest rates this year.

Russia’s ruble and South Africa’s rand slipped the most after Brent crude extended its decline, and a gauge of 20 developing-nation currencies fell for a second day. That came as Mark Mobius, executive chairman at Templeton Emerging Markets Group, called Malaysia’s ringgit undervalued and said a rebound is in sight for the assets of less advanced economies. The yuan dropped after China’s central bank cut its daily reference rate by the most since January. All 10 industry groups in the MSCI Emerging Markets Index retreated, with health care and consumer discretionary shares falling the most.

Though the Fed is forecast to keep borrowing costs unchanged at a two-day meeting that starts Tuesday, the probability of it raising borrowing costs this year has jumped to the highest in two months after U.S. economic data improved. That contrasts with the rest of the world, where the European Central Bank and its Chinese counterpart eased policy this month after Japan adopted negative interest rates in January, and investors are betting reductions in borrowing costs in Indonesia, India and South Korea.

“While we do not expect the Fed to make a move this week, they will likely stick to their expectations for a gradual pace of tightening," said Irene Cheung, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Singapore. There’s a chance of an increase in June, she said.

Currencies

The Bloomberg gauge of emerging-market currencies fell 0.3 percent to 70.58 as of 9:08 a.m. in London, paring this month’s gain to 3.2 percent. The measure climbed to a four-month high last week.

The rand and ruble dropped about 1 percent each as renewed weakness in Brent crude prices underscored the vulnerability of commodity-exporting nations. Indonesia’s rupiah weakened 0.9 percent, the most since January, while the ringgit’s 0.8 percent decline was the biggest in three weeks.

The Malaysian currency is “very undervalued" and the nation’s assets are attractive as commodity prices are reaching a bottom, Mobius said in Kuala Lumpur on Tuesday.

The Philippine peso and Mexico’s peso each lost at least 0.5 percent, while Turkey’s lira and India’s rupee dropped 0.3 percent apiece.

Bonds

India’s two-year bonds rose, pushing the yield down four basis points to 7.30 percent, after inflation cooled more than estimated, boosting speculation the central bank will lower interest rates.

The yield on similar-maturity notes in Indonesia rose for the first time in three days, jumping 11 basis points to 7.55 percent, as investors locked in gains. It has fallen 22 basis points this month before the central bank meets on Thursday. Fifteen out of 24 analysts surveyed by Bloomberg predict Bank Indonesia will cut its benchmark interest rate for a third time this year, while the rest see no change.

Malaysia’s 10-year yield dropped one basis point to 3.91 percent, while that in South Korea was little changed at 1.92 percent. Russia’s 10-year bond yield rose for a sixth day, the longest stretch since January, climbing two basis points to 9.45 percent.

Stocks

The MSCI Emerging Markets Index fell 1 percent, the most in more than two weeks, to 795.48 one day after closing at its highest level since Dec. 25. Tencent Holdings Ltd. slid 1.3 percent in Hong Kong and Taiwan Semiconductor Manufacturing Co. dropped 1 percent in Taipei, providing the biggest drag for the gauge.

The measure of developing-nation equities is up 0.2 percent this year and is trading at 11.5 times the 12-month estimated earnings of its constituents, according to data compiled by Bloomberg. That compares with a 2.4 percent drop in the MSCI World Index which has multiple of 15.8.

“The weakness today was driven by profit taking from some investors as the market has rallied recently,” said John Teja, a director at PT Ciptadana Securities in Jakarta. “With various quantitative easing measures still happening around the world, we can still see some upswing in stocks. Investors can selectively buying some good quality big-cap stocks on this weakness.”

Taiwan’s Taiex led declines in Asia with a 1.6 percent drop and India’s S&P BSE Sensex fell 1 percent. The Hang Seng China Enterprises Index of mainland stocks traded in Hong Kong retreated 0.9 percent even as the Shanghai Composite Index eked out a 0.2 percent gain in late trading amid speculation state- backed funds continued to intervene to support the market during annual policy meetings.

The Philippine Stock Exchange Index added 0.5 percent a day after the nation received the biggest equity inflow in six weeks, Russia’s Micex Index added 0.1 percent. South Africa’s FTSE/JSE Africa All Share Index snapped a three-day rally to drop 1 percent.

--With assistance from Justina Lee.

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Harry Suhartono in Jakarta at hsuhartono@bloomberg.net To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net Amit Prakash, Simon Harvey