Emerging market turmoil hits currencies

Emerging country policymakers have tried to allay fears over their economies after a spate of investors continue to sell off their emerging currencies.

A series of mismanagement allegations and political scandals in some of the world’s most prolific developing economies caused chaos on the international stock exchanges on Friday.

Traders were reacting to worries that emerging markets such as Argentina, Turkey and South Africa are on the brink of a currency crisis – leading the FTSE 100 to fall by 1.6% and the Dow Jones by 1.2%.

Political instability in Ukraine amongst other countries added to the tense atmosphere on the world’s exchanges, which had previously been riding on the back of stronger growth forecasts in America, Japan and the UK.

Currency slide

Central banks have already waded into their home markets to try and stabilise currencies negatively hit during the emerging currencies sell off.

This included those within India, Malaysia and Taiwan.

However the Indian rupee, Brazil’s real, Russia’s rouble and the South African rand all fell by over 1% versus the dollar, and Argentina’s peso hit its lowest one-day trading session since 2002.

It was the beginnings of a collapse of Argentina’s peso that ushered in a new wave of selling.

This included the Turkish lira, which, despite a fire sale which wiped out nearly a 10th of its reserves, dropped nearly 2% – and tellingly through the key 2.30 level.

In spite of the fact the lira has fallen nearly 9% overall during January, the central bank has refused calls to raise interest rates, raising fears of mounting inflation and an exodus of investors.

Indeed, investors have withdrawn around USD 4 billion from emerging market stock exchanges already this year.

The blame game

Some experts accuse reckless government spending and political corruption for the currency turmoil.

This would include Turkey – currently in the midst of a corruption investigation touching upon the Prime Minister Recep Tayyip Erdogan – and Ukraine, which has faced violent protests.

Others blamed the slowing Chinese economy, which has weakened demand for raw materials.

In addition, the US recovery and easing of the Federal Reserve’s money taps is yet another factor in the sea change.

As Chief Market Analyst at CMC Markets Michael Hewson stated: “With expectations rising that the Fed will continue to taper [quantitative easing] next week, de-risking is continuing to see capital flow into safer havens with gold, the Japanese yen and the US dollar the main gainers.”

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