Emerging market currencies suffered further sharp falls, with some hitting record lows after the US Federal Reserve said it expected to start easing stimulus measures later this year, leading the US dollar to rise across the board.
The dollar made hefty gains against major counterparts after the Fed confirmed plans on Wednesday night to slow down its purchases of bonds in the coming months if the US economy continued to show signs of improvement.
The Indian rupee hit a fresh record low as the dollar rose 2 per cent to trade just under Rs60. The Turkish lira also hit a fresh low, with the dollar rising 1.8 per cent to TL1.94
The US currency gained more than 1 per cent against the Brazilian real, South African rand, Korean won, Russian rouble and Polish zloty.
Investors have been concerned about the effect of less liquidity from the US on global markets, with emerging market assets sliding since Ben Bernanke, Fed chairman, mentioned plans to taper the central bank’s asset purchase scheme in May. Using the dollar as a funding currency to invest in riskier developing markets has been a popular trade in recent years.
Analysts at Citigroup warned in a note: “Many…EM countries now face the long-absent challenge of having to attract capital with worsening fundamentals when (with the prospect of Fed tapering) global liquidity conditions may not be easing significantly further.”
A number of emerging market central banks have stepped into the market this month to try to support their currencies, with India, Turkey, Brazil and Poland among those to take action. Analysts at Brown Brothers Harriman said they expected further interventions in the coming weeks with more volatility in emerging market currencies likely.
Currency analysts said the dollar was gaining initial support from investors unwinding risky positions in emerging markets that had been driven by expectations of long-term liquidity in the US currency.
But the prospect of tapering by the Fed was also viewed as positive for the dollar in the coming months. Investors have been particularly bullish on the US currency this year as the US economy has shown signs of outperforming other major economies. That changed the way the dollar traded earlier in the year, helping it to rise alongside US equities.
“The dollar is gaining initial support from position unwinding, which is being generated by the Fed’s announcement that it could start tapering by the end of the year,” said Ian Stannard, currency strategist at Morgan Stanley.
“The rise in US yields as a result of the market adjusting expectations for an end to QE and an eventual rise in rates will also provide the dollar with support over the medium to longer term as the US will increasingly be seen as an investment destination.”
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