The worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve's tapering of monetary stimulus, compounded by political and financial instability.
The Turkish lira plunged to a record and South Africa's rand fell yesterday to a level weaker than 11 per dollar for the first time since 2008. Argentine policy makers devalued the peso by reducing support in the foreign-exchange market, allowing the currency to drop the most in 12 years to an unprecedented low.
Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the FED first signaled it would scale back stimulus.
While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.
Developing-nation currencies sold off after a report from HSBC Holdings Plc and Markit Economics indicated yesterday that China's manufacturing may contract for the first time in six months, adding to concern that growth is losing momentum.
The declines were part of a broader slide in global markets today, with stocks in Asia, Europe and the U.S. tumbling. Yields on 10-year German bunds slipped to an 11-week low, while the yen, considered by investors as a haven, rose versus all 16 major counterparts tracked by Bloomberg.
Currencies of commodity-exporting countries that depend on Chinese demand sank, with the rand plunging 0.9 percent, following yesterday's 1.1 percent decline. Brazil's real fell 0.1 percent while Chile's peso sank 0.3 percent after decreasing 1.2 percent yesterday.
Argentina's peso fell 12 percent yesterday, marking its biggest decline since a devaluation in 2002. It sank an additional 1.5 percent today to 8.0014 per dollar.
The central bank pared dollar sales aimed at propping up the peso to preserve international reserves that have fallen to a seven-year low. Today the central bank said it would lift two-year-old currency controls and allow the purchase of dollars for savings starting next week.
The peso traded at around 13 per dollar in the black market yesterday.
In Venezuela, the government devalued its currency for airline tickets and incoming foreign direct investment on Jan. 22. International reserves are at a 10-year low.
The Turkish central bank's first unscheduled intervention in more than two years wasn't enough to stop the lira from setting a record low today. Investors are speculating the central bank's efforts to prop up the lira by burning through foreign-exchange reserves will prove futile without raising interest rates.
The lira plunged to a record 2.336 per dollar and also declined to an all-time intraday low of 3.2069 per euro. Turkey's central bank refrained from raising benchmark rates this week, fueling concern that it will be difficult to finance current-account deficits.
Turkey holds about $33 billion in foreign reserves, excluding deposits from commercial banks, only enough to cover 1 1/2 months of imports, according to Citigroup Inc.
The International Monetary Fund predicts that the growth advantage of emerging markets over advanced economies will shrink this year to the smallest since 2001.
The Washington-based group kept its expansion forecast for developing countries this year at 5.1 percent on Jan. 21, while raising the outlook for advanced economies to 2.2 percent, from the 2 percent estimated in October.
China is struggling to contain $4.8 trillion in shadow-banking debt, raising concern about the growth outlook for a country that buys everything from Chile's copper to Brazil's iron ore.
A corruption investigation is embroiling Turkish Prime Minister Recep Tayyip Erdogan's cabinet, while deadly protests in Ukraine and Thailand are eroding confidence in the political stability of developing nations.
A Bloomberg customized gauge tracking 20 emerging-market currencies fell 0.4 percent to 89.8 today, the lowest level since April 2009.
The index has tumbled 9.7 percent over the past 12 months, bigger than any annual decline since it slid 15 percent in 2008.
Ukraine's hryvnia has slumped as Parliament planned to hold an emergency session after anti-government protests led to fatalities this week. The currency fell as low as 8.48 per dollar, the weakest since 2009, before reversing losses to gain 0.1 to 8.435 per dollar.
South Africa's rand tumbled as much as 1.8 percent to 11.1949 per dollar today on concern a strike at the world's biggest platinum mines would dent the country's exports.
The selloff in emerging-market currencies started in May, when the FED signaled it may pare the monthly asset purchases that had helped fuel investment in developing nations.
Yields on U.S. Treasuries rose in response.
He said it's "not unreasonable" for the Argentine peso to fall to 14 per dollar.
The recent weakness has created buying opportunities for some emerging markets with stronger economic prospects, according to Marcela Meirelles, a Latin America sovereign strategist at TCW Group Inc.
HSBC recommends clients buy the Mexican peso against the Chilean peso, saying Mexico's currency will benefit from expansion in the U.S. as efforts to open up the energy industry to outside investment boost its southern neighbor's long-term growth potential.
While differentiation is important, the end of China's "investment and export boom" may still put emerging-market currencies on a declining trend, according to Morgan Stanley.
Morgan Stanley has a "reduce" rating on emerging-market currencies, while recommending selling the Russian ruble against the dollar.
Brazil's real fell to a five-month low of 2.4327 per dollar today and has lost 28 percent over the past two years.
Brazil should return to the policies of former President Luiz Inacio Lula da Silva to boost growth, tame rising consumer prices and attract foreign investment, Pacific Investment Management Co. said yesterday.
Pimco Chief Investment Officer Bill Gross said last week that Brazil was no longer a preferred market.
The comment came more than a decade after the firm bought the country's bonds as they plunged before presidential elections in 2002, a bet that proved prescient.