Sunday, August 21, 2011
Exchange Rates and Emerging Markets ~ Need to Protect Currencies ...
As global markets sell off, some emerging nations have stepped into foreign-exchange markets to prevent steeper declines in their currencies, a contrast to safe-haven countries dealing with strong gains in their exchange rates.
In recent weeks, Turkey and Indonesia have taken or forewarned of measures to curb their currencies' slides after global growth worries sent equities sliding world-wide and investors fleeing emerging markets.
Earlier this month, South Korean authorities said they would step up monitoring of local financial markets, including conditions in the foreign-exchange market, amid heightened volatility. Currency dealers also suspected Korea's central bank of reversing its usual U.S. dollar-buying interventions by selling dollars to support its currency amid a plunge in the local stock market last week.
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The nations' moves to stabilize their currencies are still relatively small. They come as countries seen as safe havens, such as Switzerland and Japan, have moved aggressively to reverse their currencies' advances.
In the past week, the Swiss National Bank pumped liquidity into the market for the third time in an attempt to curb the franc's relentless gains. The Bank of Japan intervened to halt the yen's advances against the dollar about two weeks ago.
The moves by emerging nations highlight a reversal in the pressures they face. Their central banks are now walking a fine line as they try to manage sharp declines and swings in their currencies, which had previously been rallying more than they had wanted.
For investors, one possible outcome is that emerging nations may need to put in fewer currency controls if investment flows moderate from the previous surge.
"Most emerging markets still need external financing, and if they felt like that wall of money is suddenly withdrawing, they might loosen up in terms of their controls," said Sara Zervos, a senior portfolio manager at Oppenheimer Funds.
Both Turkey and Korea earlier this year took concerted steps to hold down the lira and the won as ultra-low interest rates in the developed world—and quantitative easing in the U.S.—helped flood emerging markets with foreign capital. While these countries still don't want their currencies to strengthen too much, they are also reluctant to allow them to depreciate too sharply or to a level where they completely dry up long-term foreign investment flows.
Turkey's moves to manage its currency have been pushing policy makers seemingly to work in both directions. Turkey's central bank cut rates and bought dollars earlier this year in order to weaken its currency. But the bank has subtly shifted its policy in recent weeks, after investors fled the currency on concerns about the central bank's unorthodox policy mix.
"Part of the plan was to weaken the lira, but they lost control of it," said Ilan Solot, a currency strategist with Brown Brothers Harriman. The central bank canceled U.S. dollar-buying auctions and instead began auctions to sell dollars to prevent the lira from sliding too much. A central bank governor last week said the bank was prepared to further boost dollar auctions to limit further depreciation.
Against the dollar, the lira has fallen more than 15% year-to-date, and the won has lost about 3% this month, though is still up for the year.
Analysts say any efforts by emerging-market central banks to fight currency moves are likely to be short-term and not enough to reverse long-term investment trends, which overall still favor emerging-market strength because of their robust economic growth. A downturn in global growth, though, could reverse that trend significantly.
Some Asian central banks also have been trying to play a balancing act, though on a more subdued scale.
Bank Indonesia said last week it will buy back rupiah-denominated government bonds from investors if it is so approached, adding it will sell dollars and use the rupiah proceeds to fund the buybacks.
Dealers also suspected Indonesia's central bank of intervening directly in the market by selling dollars earlier this month. The country is known for taking steps to stabilize its currency in the case of severe currency swings in either direction, while being much more tolerant of currency appreciation than its emerging-market counterparts.
source http://www.einnews.com/
