People are reflected on a sign displaying the rate of exchange between the Argentine peso and the US dollar at a foreign exchange house in downtown Buenos Aires, Argentina, Tuesday, Jan. 28, 2014. Emerging economies scrambled to prop up their currencies on Tuesday as time runs out for US Federal Reserve stimulus, exposing them to capital outflows. AP
LONDON—Emerging economies scrambled to prop up their currencies on Tuesday as time runs out for US Federal Reserve stimulus, exposing them to capital outflows.
The prospect of a further tightening of US monetary policy on Wednesday brings closer the risk that stimulus tapering would vacuum more cash from emerging economies, slow global growth and dent the eurozone’s recovery.
Several top emerging markets have already suffered from capital outflows as the US central bank curbs its so-called quantitative easing (QE) bond-buying stimulus.
That policy had fed flows of US money abroad in search of high returns.
The currency turmoil is hurting emerging economies in Asia, Latin America, Russia and South Africa as investors pull out funds out of riskier investments, analysts said.
India’s central bank announced a surprise quarter-point increase in its key rate to 8.0 percent on Tuesday
The worries over markets such as Argentina, Brazil, India, Russia, South Africa, Thailand, Turkey, Russia and Ukraine come as the eurozone is emerging from the worst of its sovereign debt crisis.
In addition, Turkey, Thailand and Ukraine have all faced political unrest in recent weeks.
Fed cuts stimulus by $10B
The Fed has already cut its stimulus this month by $10 billion (7.3 billion euros) to $75 billion a month on signs of a pick-up in the US economy, the world’s biggest.
Traders are now on tenterhooks to see whether the Fed will announce further stimulus cuts at the conclusion of its two-day monetary policy meeting on Wednesday.
Economists are also pricing in tighter monetary policy from the Bank of England (BoE), with Britain’s economic recovery expected to pick up more speed this year.
“Quantitative easing can be likening to a tide of cheap money across risky assets. So, when the tide goes out we can see who is swimming naked,” Rabobank analyst Jane Foley told AFP.
“If cheap money is being wound down, emerging market counties will be more exposed.”
She added: “These countries rely on foreign savings to finance their deficits and when foreigners lose their nerve and pull their money out, the currencies adjust lower.”
Argentina adds to pressures
The turmoil intensified last week when Argentina implemented a sharp devaluation in an attempt to stabilize its peso currency, which held steady on Tuesday.
However, the fallout of Argentina’s problems and global monetary tightening continued to hit other emerging markets this week, most notably neighbour Brazil where the real currency hit a five-month trough.
South Africa’s rand hit a five-year low point on Monday, while Turkey’s central bank called a crisis meeting after its heavy intervention failed to halt a run on the lira.
“The Fed’s decision to taper QE, combined with the increasing likelihood that the BoE is moving closer to tightening monetary policy, is serving to further reinforce investor concerns over external financing for countries such as Turkey and South Africa with elevated current account deficits,” said economist Lee Hardman at The Bank of Tokyo-Mitsubishi UFJ in London.
All eyes on Turkey rate decision
The beleaguered Turkish lira recovered from all-time lows on Tuesday amid expectations that the nation’s central bank will raise interest rates at midnight, a move that could support the lira.
The Turkish lira has plunged further in recent weeks, pressured also by the political crisis rocking Prime Minister Recep Tayyip Erdogan’s government.
“Emerging markets continue to be the economic front line in the current market,”said Alistair Cotton, analyst at traders Currencies Direct.
“Fed tapering is driving capital flight and putting downward pressure on many emerging market currencies.”
However, despite growing emerging markets turmoil, eurozone nations are not worried about contagion, Eurogroup chief Jeroen Dijsselbloem insisted this week.
“Of course we are worried about this from the perspective of the emerging countries,” said Dijsselbloem, whose Eurogroup comprises the finance ministers of countries that use the single currency.
“I am not particularly worried about the risk of contagion. I think the position of the eurozone is different and that we have to maintain our progress.”
He added that recent tapering of the US stimulus program was partly responsible, but that emerging economies also had to tackle “structural imbalances”.
Analysts expressed caution over the eurozone outlook.
“Dijsselbloem and other politicians probably feel obliged to give reassuring messages to investors,” said Foley.
“Although it cannot be said with complete certainty that there will be no contagion into the eurozone, the region’s large current account surplus, the fact that there has been little sign of systematic risk on the eurozone for a while, and the improving economic data are reassuring.”—Roland Jackson