Banks spend billions in vain bid to prop up currencies

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CENTRAL banks across the developing world waded into currency markets on Friday to try and stabilise currencies that were rapidly depreciating in an emerging markets selloff.

The Turkish lira hit record lows despite an estimated $3bn of intervention during the previous session. The rouble and the rand languished at levels not seen since the 2008-2009 financial crisis.

“It’s a general weakness in those emerging market currencies – rouble, rand, lira – where the market has a view that the central bank will not act properly on market weakness,” said Ulrich Leuchtmann, head of emerging FX strategy at Commerzbank.

In Turkey, the central bank has refused to raise interest rates, even though the lira has fallen almost nine per cent this month, raising fears of mounting inflation and an investor exodus. It has relied instead on auctioning dollars, and on Thursday resorted to what analysts said were its first direct interventions since early 2012.

Despite the sales, totalling almost a tenth of Turkey’s reserves, the lira dropped nearly two per cent.

“The (Turkish central bank) simply does not have enough firepower to fight the pressure against the lira,” RBS analysts said in a client note.

“It has now exhausted its ‘no hike’ toolkit and its next major policy action will have to be a straightforward increase in the lending rate.”

The lira is only one of many currencies feeling the heat from investor worries over China and over the reduction in US stimulus, expected from this month, which is likely to affect investment flows into emerging economies.

Central banks believed to have intervened to defend their currencies on Friday include India, Taiwan and Malaysia. Russia again moved the rouble’s trading band after $350m in currency sales.

There was little respite, however. The rupee, Brazilian real, rouble and rand all fell more than one per cent against the dollar. The Russian currency also hit a record low to the euro.

“I think we may see some actions from central banks, they will try to curtail the sell-off... They are unlikely to be able to stabilise the currencies,” said Lars Christensen, an analyst at Danske Bank in Copenhagen.