Currency investors rebel as emerging-market rate jumps fail

Investors beating a retreat from emerging markets tested the resolve of central banks fighting to protect their economies from sliding exchange rates.

The Turkish lira swung between gains and losses and South Africa’s rand touched its lowest level in more than five years against the dollar after policy makers raised interest rates higher than predicted by economists. Russia’s ruble tumbled to a record, Brazil’s real slid to the weakest since August and Hungary’s forint tumbled the most in more than 18 months.

The selloffs underscored the exodus from assets of developing nations as the Federal Reserve tightens the monetary spigot. The U.S. central bank tapered its quantitative easing today as it announced plans to trim monthly bond buying by $10 billion to $65 billion, deepening investor unease over slowing growth and a dependence on external capital flows in emerging markets.

“Whenever the Federal Reserve tweaks its interest-rate policy, it ends up blowing up some emerging market,” said Ben Deschaine, head of liquid alternatives at Boston-based Balter Capital Management, LLC, which farms out money to hedge funds. “Beginning in 2007 we saw money flowing into emerging markets, but after three years of massive underperformance the money is now going the other way. At some point the markets will reach a level that’s attractive, but we aren’t there yet.”

Turkey and South Africa followed counterparts from Brazil to India in tightening monetary policy after the stocks of emerging markets suffered their worst start to a year in five. Once the locomotives that drove the world from its 2009 recession, investors are now reviewing the returns such economies can provide as their economies weaken and the Fed curbs the stimulus that pushed capital into their borders.

Turkey Reversal

Today’s wild swings followed initial gains after Turkey’s central bank met in an extraordinary late-night meeting. The policy makers more than doubled the one-week repurchase rate to 10% from 4.5% in a bid to halt a currency run partly propelled by domestic political upheaval. Prime Minister Recep Tayyip Erdogan, who said yesterday he’s always opposed higher rates, is caught in a graft scandal that has ensnared several ministers.

While the Turkish lira initially rallied as much as 4% against the dollar, it fell as much as 3% and was down 0.1% at 2.2544 per dollar as of 3:01 p.m. in New York.

“It’s good that Turkey is turning more orthodox, but they are hiking a lot, which means the impact on the economy and on the banks could be a lot,” said Pierre-Yves Bareau, the global head of emerging-market debt at JPMorgan Asset Management Ltd., which oversees $1.5 trillion in assets. “They are trying to do things, but I don’t think it’s sufficient to be optimistic.”

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