The worst sell-off in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve’s tapering of monetary stimulus, compounded by growing political and financial instability.
The Turkish lira plunged to a record, while Ukraine’s hryvnia sank to a four-year low and South Africa’s rand fell to the weakest level since October 2008, after tumbling yesterday beyond 11 per dollar for the first time since 2008. Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing it to drop the most in 12 years to an unprecedented low.
Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.
“The current environment is potentially very toxic for emerging markets,” Eamon Aghdasi, a strategist at Societe Generale SA in New York, said in a phone interview yesterday. “You have two very troubling things: uncertainty about the Fed policy, combined with concerns about growth, particularly in China. It’s difficult to justify that it’s time to go out and buy emerging markets at the moment.”
Global Declines
Developing-nation currencies sold off after a report from HSBC Holdings Plc and Markit Economics yesterday indicated that China’s manufacturing may contract for the first time in six months, adding to concern that growth is losing momentum.
The declines were part of a broader slide in global markets today, with European stocks falling, U.S. stock futures lower and Asian shares tumbling. The yield on 10-year German bunds slipped to an 11-week low, while the yen, considered by investors as a haven, rose versus all 16 major currencies.
Currencies from commodity-exporting countries that depend on Chinese demand sank, with the rand plunging 1.7 percent, extending yesterday’s 1.1 percent decline. Brazil’s real fell 1.3 percent, while Chile’s peso was down 1.3 percent yesterday.
Argentina’s peso has plunged 37 percent in the past year, while the lira is down 24 percent.
Turkey Intervenes