Investors sought out the safe havens of German bonds and the Swiss franc on Wednesday after deep splits in Turkey over interest rate increases meant only the briefest of respites from the escalating crisis in emerging markets.
The Turkish lira lost all the gains seen after the central bank raised the cost of overnight borrowing by 4.25 points to 12% once the prime minister, Recep Tayyip Erdogan, strongly attacked a move designed to counter high inflation and halt capital flight.
South Africa became the latest country forced to raise borrowing costs to defend its currency, pushing up the cost of borrowing for the first time since 2008. Brazil, Indonesia and Thailand are seen as the next three most likely emerging market candidates for tighter policy.
Share prices fell on the world's leading bourses, with investors rattled that the Indian, South African and Turkish currencies all weakened despite attempts by policymakers to shore them up with higher interest rates.
In London the FTSE 100 closed slightly lower at 6544 following a 28-point fall, while the dollar weakened against two traditional safe-haven currencies – the Japanese yen and the Swiss franc.
The Russian rouble hit a record low on the foreign exchanges amid speculation that the slow-growing commodity-dependent economy was likely to be one of the next countries to feel the impact of the emerging market sell-off.
"The fact that currencies have continued to weaken even in countries that have started to raise interest rates opens up a new, and potentially more worrying, phase of the recent turmoil in EM financial markets in which beleaguered policymakers find themselves unable to defend their currencies," said Capital Economics.
The London-based consultancy said, however, that not all emerging markets were likely to be caught up in the deepening crisis and expressed confidence that countries such as Mexico, Poland and the Philippines were likely to shrug off the effects of weakening currencies.
Turkey was again the centre of attention on Wednesday after Erdogan made it clear he vehemently opposed the decision to raise interest rates and that the central bank would be responsible for any damage caused to the economy.
The lira gained almost 4% after the central bank finally decided on Tuesday to ignore Erdogan's opposition and adopt a more aggressive policy stance, but the gains rapidly melted away as investors reacted with alarm to the political schism.
Michael Hewson of CMC said: "The bumper rate hike by the central bank of Turkey had a shelf life of less than 18 hours after Turkish prime minister Erdogan criticised the decision by saying that he would blame central bank officials for any damage caused to the economy by a slowdown in growth.
As a result. the lira reversed all of last night's gain, after last night's initial spike higher. "The South African rand has also weakened sharply despite a 0.5% rate hike by the South African Reserve Bank. The net effect was the equivalent of standing in front of a runaway truck as after a brief spike, the move lower continued apace."
theguardian.com
The Turkish lira lost all the gains seen after the central bank raised the cost of overnight borrowing by 4.25 points to 12% once the prime minister, Recep Tayyip Erdogan, strongly attacked a move designed to counter high inflation and halt capital flight.
South Africa became the latest country forced to raise borrowing costs to defend its currency, pushing up the cost of borrowing for the first time since 2008. Brazil, Indonesia and Thailand are seen as the next three most likely emerging market candidates for tighter policy.
Share prices fell on the world's leading bourses, with investors rattled that the Indian, South African and Turkish currencies all weakened despite attempts by policymakers to shore them up with higher interest rates.
In London the FTSE 100 closed slightly lower at 6544 following a 28-point fall, while the dollar weakened against two traditional safe-haven currencies – the Japanese yen and the Swiss franc.
The Russian rouble hit a record low on the foreign exchanges amid speculation that the slow-growing commodity-dependent economy was likely to be one of the next countries to feel the impact of the emerging market sell-off.
"The fact that currencies have continued to weaken even in countries that have started to raise interest rates opens up a new, and potentially more worrying, phase of the recent turmoil in EM financial markets in which beleaguered policymakers find themselves unable to defend their currencies," said Capital Economics.
The London-based consultancy said, however, that not all emerging markets were likely to be caught up in the deepening crisis and expressed confidence that countries such as Mexico, Poland and the Philippines were likely to shrug off the effects of weakening currencies.
Turkey was again the centre of attention on Wednesday after Erdogan made it clear he vehemently opposed the decision to raise interest rates and that the central bank would be responsible for any damage caused to the economy.
The lira gained almost 4% after the central bank finally decided on Tuesday to ignore Erdogan's opposition and adopt a more aggressive policy stance, but the gains rapidly melted away as investors reacted with alarm to the political schism.
Michael Hewson of CMC said: "The bumper rate hike by the central bank of Turkey had a shelf life of less than 18 hours after Turkish prime minister Erdogan criticised the decision by saying that he would blame central bank officials for any damage caused to the economy by a slowdown in growth.
As a result. the lira reversed all of last night's gain, after last night's initial spike higher. "The South African rand has also weakened sharply despite a 0.5% rate hike by the South African Reserve Bank. The net effect was the equivalent of standing in front of a runaway truck as after a brief spike, the move lower continued apace."
theguardian.com
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