Currencies lift on rate hikes then turn tail

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Reuters and Bloomberg Singapore and London

EMERGING market currencies rose early yesterday after Turkey boosted interest rates but were back under pressure later in the day as expectations that the US Federal Reserve would press ahead with stimulus cuts revived doubts about the appeal of developing markets.

The Turkish central bank’s massive increase in the overnight lending rate by 425 basis points to 12 percent stirred hopes of breaking the vicious cycle of selling in emerging markets. The bank also raised its one-week repo rate to 10 percent from 4.5 percent.

But the cracks were already beginning to reappear during another turbulent session in Europe. The Turkish lira gave back almost two-thirds of its earlier 3.3 percent surge and stocks in Istanbul buckled 2.47 percent.

After rising to 2.165 to the dollar, the lira slumped to 2.229, putting Monday’s historic low of 2.39 liras back in view.

“Certainly a bit of shock and awe on the rate hike but if this doesn’t work in arresting the decline in the lira, you do have to wonder what other measures the Turkish central bank has,” Michael Hewson, an analyst at CMC Markets, said.

“Do you jack up rates again?

“My big concern is they start talking about capital controls.”

European shares had initially ridden the wave of optimism that spilled in from Asia, but by early afternoon the gains in Britain’s FTSE 100, Germany’s DAX and France’s CAC 40 indices had been slashed to between 0.1 percent and 0.2 percent.

The Fed was widely expected to trim its asset buying programme by another $10 billion (R110bn) a month after the conclusion of its two-day policy meeting later yesterday.

The dollar was largely biding its time ahead of the meeting but with emerging market jitters bubbling again, traditional safe havens such as the yen, German bonds and gold were all in demand.

Turkey’s decision followed India’s unexpected increase in interest rates on Tuesday.

India’s rupee initially appreciated 0.6 percent versus the dollar yesterday but had given up most of those gains by the end of the day. It gained 0.9 percent on Tuesday. South Korea’s won advanced 1 percent, boosted by a record current account surplus.


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