A swathe of emerging market currencies sold-off once again on Tuesday, sparked by sharp falls in equity indices across the developing world.
Currency weakness spread from Indonesia to South Africa, Poland, Turkey, Iceland and Chile.
In contrast the US dollar, chalked up its seventh straight daily gain as it once again proved a safe haven amid the financial storm.
The sell-off started in Asia, where Japan’s Nikkei 225 equity index crashed 4.1 per cent, before spreading west.
In Asia the Indonesian rupiah fell 0.8 per cent to Rp9,485 to the dollar, a five-month low and the South Korean won 0.5 per cent to Won961.3. The dollar of New Zealand, another country that has seen significant portfolio inflows - meaning there are significant long positions to be exited - fell 1 per cent to $0.6223.
As the contagion spread, the Turkish lira tumbled 2.8 per cent to a three-year low of TL1.5962 to the dollar, despite the central bank intervening to buy the lira for the first time since May 2004.
The Polish zloty fell 0.6 per cent to 4.0169 zlotys to the euro, a seven-month low, and the Icelandic krona slid 1.5 per cent to IKr75.14 to the dollar as Fitch Ratings said Iceland’s economy was heading for a “hard landing” and a sharp drop in employment.
The South African rand fell 1.1 per cent to R6.825, an 11-month low, weighed down by the continuing slide in gold prices, while tumbling copper prices led the Chilean peso to fall 0.6 per cent to 546 pesos to the dollar.
Despite this, there was no universal agreement as to the cause of the turmoil. “The inflation concern has become a scare, putting equity and commodity markets under substantial selling pressure,” said Hans Redeker, head of currency strategy at BNP Paribas.
However Steve Pearson, chief currency strategist at HBOS, argued: “Markets do not appear to be worried about inflation itself. This is evidenced by the fact that break-even inflation rates derived from inflation protected securities in the US, France, Japan and the UK have been declining since mid-May when the spike in risk aversion began.
“The big worry for global markets appears to be that lingering upward pressure on inflation will mean central banks are slow to ease policy in response to softer economic and financial market conditions. The legendary Greenspan put, where the Fed cut rates at the first sign of trouble, has expired.”
Among major currencies, the yen sold-off well after the close of Tokyo trade, tumbling 0.6 per cent to Y115.06 to the dollar, 0.6 per cent to Y144.77 to the euro and 0.5 per cent to Y211.73 against sterling.
Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi UFJ, suggested the 18 per cent fall of the Nikkei 225 since mid-April could delay the ending of Japan’s zero interest rate policy. “If market sentiment is still fragile come July, it is very unlikely that the Bank of Japan will move, said Mr Halpenny, who added that the next Tankan survey of business sentiment may disappoint because of the market turmoil.
Tony Norfield, global head of FX strategy at ABN Amro, said fears that foreign investors would continue to sell Japanese stocks, a process that has happened for 14 straight trading days, were weighing on the yen.
“A number of our clients have been dumping the yen for this reason,” he said.
The dollar continued to gain from the turmoil, firming a fraction to $1.2582 to the euro and $1.8399 against sterling.
Marc Chandler at Brown Brothers Harriman saw signs that the dollar rally may be running out of steam, given the small gain off the back of weak German investor sentiment data, but Michael Woolfolk at Bank of New York predicted US interest rates would rise from 5 to 6 per cent by the middle of next year, providing potential fuel for further dollar gains.
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