Foreign exchange reserves are emerging as the latest battleground between traders and developing nations trying to stem the worst rout in their currencies since 2008.

Nations with the smallest reserves to fend off currency speculators will continue to see their exchange rates under pressure, options prices show. Of the 31 major currencies tracked by Bloomberg, traders are most bearish on Argentina’s peso, Turkey’s lira, Indonesia’s rupiah and the rand, while the forwards market signals that Ukraine’s hryvnia will fall 20 percent in a year.

“If you start to burn too quickly through your foreign reserves, it’s an ominous sign – and of course in the forex market, they smell blood,” Robbert van Batenburg, the director of market strategy at broker Newedge Group in New York, said at the beginning of this month. “It creates this domino effect,” he said.

Emerging markets are under siege as the Federal Reserve pares its record stimulus measures and reports showing a slowdown in Chinese manufacturing raise concerns about the strength of their economies. A Bloomberg index tracking 20 exchange rates has fallen 2 percent this year, on top of the 7 percent decline last year.

Turkey spent 27 percent of its foreign reserves trying and failing to defend its currency since June, leaving it with $34 billion (R373bn) on Monday, excluding commercial banks’ deposits. That is only enough to cover 0.29 percent of short-term debt, the least among 14 developing nations tracked by Goldman Sachs Group.

South Africa’s $46bn amounts to 13 percent of gross domestic product, less than the 18 percent it needs to finance its trade deficit and debt, according to the US bank.

The lira fell to a record 2.39 to the dollar and the rand tumbled to a more than five-year low of R11.3909 last month.

“Burning through their reserves, that’s not sustainable,” Viktor Szabo, a money manager in London at Aberdeen Asset Management, said last week.

“People will be more than happy to short your currencies,” he said, referring to a strategy of betting against an asset. “The pressure was there and there’ll be more pressure.”

Kazakhstan’s central bank devalued the tenge by the most since 2009 on Tuesday after its international reserves dropped to about the lowest since 2009, while Argentina spent $25bn since March 2011 defending the peso, driving the stockpile to a seven-year low. The peso has still weakened 16 percent this year.

“Foreign exchange reserves can be thought of as a shock absorber at times of volatility, allowing emerging market central banks to buffer their currencies against sharp declines by supplying US dollars to the market,” Goldman Sachs analysts Robin Brooks and Julian Richers wrote in a January 29 report.

“Countries with low reserve cover are relatively more vulnerable.”

Both Turkey and South Africa resorted to raising interest rates last month to deter speculators, which Citigroup warns may trigger a “vicious circle” of slower growth.

Turkey’s central bank increased its benchmark rates to as high as 12 percent at an emergency meeting on January 28, prompting a rally in the lira of more than 4 percent.

South African policymakers unexpectedly raised rates by a half point to 5.5 percent on January 29, a day before the rand dropped to its low. Since then, the currency has rallied 3.2 percent, the best performance among 31 major currencies after the Australian dollar.

“I wouldn’t be short exclusively on the basis that they have little reserves,” Ilan Solot, a strategist in London at Brown Brothers Harriman, said last week.

“If they don’t start getting their act together, and if reserves continue to be depleted, then we’re rapidly approaching a currency crisis. That thought is unsettling.’’

Across the developing world, borrowing costs still were not high enough to protect the “weakest links” among emerging nation currencies, Citigroup strategists led by London-based Jeremy Hale wrote in a client note last week.

“Vulnerable emerging markets face the risk of falling into a vicious circle,” the strategists wrote. “Weaker growth and higher rates could weigh on local asset markets” and “if this then leads to unwinds, capital outflows could lead to renewed currency weakness, which would require higher rates once again”.

Mark Mobius of Templeton Emerging Markets Group says the exodus from developing nations is “almost over”, while Goldman Sachs Group chief executive Lloyd Blankfein argues that these economies are in better shape than during the Asian crisis of the late 1990s.

The experience of South Africa and Turkey suggests that not all developing currencies will share in a rebound.

Mobius, whose firm manages $50bn in developing nation assets, told Bloomberg Radio on Tuesday that the market was “nearing the end of this big rush out of” emerging markets.

Blankfein said in a Bloomberg Television interview on Tuesday that developing economies had “better reserves, more flexibility in exchange rates, better policy” than during the 1998 Asian crisis, when South Korea and Thailand spent billions trying to defend exchange rate pegs, only to eventually devalue and seek International Monetary Fund bailouts.

Traders are paying a 6.99 percentage point premium for three-month options to sell the Argentine peso over contracts to buy, the most since September 2012, risk-reversal rates show.

While the premiums for the lira, rand and rupiah have declined from recent highs, they’re still above the average across emerging markets and higher than levels at the end of October. The gauge for the lira was at 3.95 percentage points, compared with 2.78 percentage points on October 31, while the gap for the rand was at 3.31 percentage points, from 2.94 percentage points. The rupiah’s rate was 3.89 percentage points, from 3.61, data compiled by Bloomberg show.

Ukrainian policymakers let the hryvnia plunge to a five-year closing low of 8.855 to the dollar on February 6 after spending 54 percent of the country’s reserves since April 2011 to keep the currency steady. The reserves declined to an eight-year low of $18bn last month, from $38bn in April 2011.

Non-deliverable 12-month forwards for the hryvnia traded at 10.405 to the dollar on Tuesday, implying a 17 percent decline in the currency, according to data compiled by Bloomberg.

In Indonesia, policymakers have given up on using reserves as the main tool for defending the rupiah after spending $20bn in the seven months to July and still failing to stem the currency’s slide.

Instead, officials have reduced fuel subsidies to cut the budget deficit and raised interest rates.

“Everyone is looking to bring rates higher,” Simon Quijano-Evans at Commerzbank in London, said last week.

“It’s the first step in calming the situation. You cannot continue using foreign reserves if no one believes in your policy.” – Bloomberg