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By Bloomberg

Traders are getting that sinking feeling again about developing-nation currencies.

A basket of 20 of the currencies has tumbled 3.3 percent this year through Wednesday to the lowest since Bloomberg began tracking the data in 1999. The losses have left emerging-market options traders bracing for more: They’re now paying the most in almost 17 months to protect against further declines.

The deepening pessimism underscores just how out of favor developing-nation assets have become as a plunge in commodity prices throttles their economies and darlings from Brazil to China lose their shine. Investors are also increasingly turned off by the interest-rate cuts carried out by the likes ofTurkey and Russia -- moves that were aimed at shoring up growth but which portend diminished returns on fixed-income assets.

“There’s a lot more room for emerging-market currencies to weaken,” Daniel Tenengauzer, head of emerging-market and global foreign-exchange strategy at RBC Capital Markets, said by phone from New York. “Some of the big EM countries are not in a good shape.”

The Bloomberg gauge of developing-nation exchange rates dropped to 78.34 Wednesday, leaving it down 28 percent since it peaked in April 2011. Declines in emerging-market currencies accelerated this week, with Brazil’s real sinking to a decade low, Turkey’s lira reaching the weakest on record and South Africa’s rand slumping to the lowest since 2002. The currencies of Mexico and Peru retreated to levels last seen during the 2009 global financial crisis.

Petrobras Scandal

The emerging-market index rose 0.5 percent today after leaders of Russia, Ukraine, Germany and France agreed Thursday on a cease-fire to stem the conflict that’s killed thousands of people. The index is still down 2.8 percent this year.

The losses have been fueled by speculation the Federal Reserve will boost interest rates soon, luring money from developing markets to the U.S. as economic growth there strengthens.

There’s been no shortage of catalysts for the declines coming from the developing world.

In Brazil, a kickback scandal ensnaring state-controlled oil producer Petroleo Brasileiro SA is roiling the nation’s financial markets and prompting renewed calls for the impeachment of President Dilma Rousseff. A report showing a record decline in retail sales for December on Wednesday sent the real to as low as 2.8819 per dollar, the weakest since October 2004.

Goldman’s Recommendation

Money is also pouring out of China as the world’s second- largest economy slows. The country recorded capital outflows of $91 billion in the fourth quarter, the most since at least 1998. The government reported this week a 20 percent drop in imports for January that was the biggest in five years. The yuan is hovering near an eight-month low reached on Feb. 2.

The China slowdown and slumping yuan now have Goldman Sachs Group Inc. recommending clients sell the currencies of trading partners such as South Korea and South Africa.

“The activity weakness in China could be a new dynamic for EM FX,” strategists led by Kamakshya Trivedi said in a note Wednesday. China’s slowdown is likely to “weigh primarily” on Asian currencies and commodity exporters, they said.

Bullish Call

In Nigeria, investors are dumping the nation’s stocks and bonds, sending the naira to record lows, after escalating violence by the Islamist group Boko Haram prompted the electoral commission to postpone national elections. The central bank’s focus on propping up the currency in spite of falling oil has caused analysts including Bank of America Corp. to question the policy makers’ credibility.

Not everyone is pessimistic on emerging markets.

Morgan Stanley raised its rating on developing-nation currencies to neutral from “underweight” on Feb. 6 and ditched calls to sell the rand and Chilean peso against the dollar, citing the recent rebound in oil and an up-tick in European growth data.

“We have been bearish” on emerging-market currencies “for some time,” Morgan Stanley strategists including London- based James Lord said in the note. “And we think it is time to take a step back.”

Lew’s Warning

Options traders aren’t heeding that call. They’re demanding an average premium of 3.01 percentage points for the right to sell emerging-market currencies over the right to buy, the most since September 2013, according to three-month implied volatility data compiled by Bloomberg.

The extra yield to sell the Turkish lira rose to 4.92 percentage points this week, the highest since March last year.

For developing nations hoping their weaker exchange rates will aid their growth-spurring efforts, UBS AG’s Bhanu Baweja says that likely won’t work out.

“The ability of the currency weakness to heal the economy has diminished,” Baweja, the London-based head of emerging- markets cross-asset strategy at UBS, said by phone. “It helps but there are structural issues that are not going to be fixed by a bit of currency weakness.”

On Feb. 10, U.S. Treasury Secretary Jacob J. Lew warned fellow finance chiefs against resorting to currency devaluations to fuel export-driven economic growth.

Developing countries’ bid to revive their economies with rate cuts helped push the average yield on their debt over benchmark five-year U.S. Treasuries to just 4.56 percentage points last week, data compiled by JPMorgan Chase & Co. show. That’s the smallest since May 2013, when emerging-market currencies plunged the most in a year.

“Investors are asking if the yields are sufficient for the risk,” Nick Verdi, a strategist at Standard Chartered Bank, said by phone from New York. “Coming out of a period of historically low volatility, investors will be more sensitive to any signals of those cutting rates.”