A sudden leap in the dollar fuelled by concerns over the health of the global economy battered emerging market currencies on Thursday, evoking memories of the sharp declines developing economies such as Turkey suffered in 2018.
MSCI's Emerging Markets Currency Index suffered falls for a fifth straight session and plumbed its lowest level in more than three months while the dollar roared to its highest point since June 2017 on Wednesday against a basket of other currencies.
Several emerging currencies have been beset by weakness in recent weeks and - much like in 2018 - Turkey and Argentina are hogging the limelight. Argentina's peso has plummeted nearly a fifth against the dollar since the start of the year, roiled by uncertainty over the outlook for the economy mired in a painful recession and suffering from high inflation with Buenos Aires gearing up for the October presidential election.
Turkey's lira has lost 11 percent in 2019 and the central bank holding interest rates and removing a reference to possible future tightening on Thursday doing little to reassure investors rattled by Ankara's toxic cocktail of unconventional monetary measures, political risk and recession hit economy.
"With Turkey, there is always a risk that it could get exponentially worse because the central bank waits way too long," said Ulrich Leuchtmann, head of FX & EM research at Commerzbank in Frankfurt. "Once the Turkish lira descends into crisis mode, you will feel that in the South African rand, the Brazilian real and even the Russian rouble."
South Africa's rand this week hovered near a four-week low, while the Russian rouble fell to a two-week low against the dollar on Thursday. "When a high profile country like Argentina comes under pressure everybody loves to sell," said Aberdeen Standard Investment's head of EM debt Edwin Gutierrez.
"It never tends to last very long but that is the nature of the beast, the correlation causes the knee-jerk reaction". Underpinning the dollar's recent strength has been more dovish turns by global central banks outside the United States, as well as data pointing to a robust performance of the US economy and a surge in Wall Street stocks to record highs.
Investors fretting about the impact of strong oil prices on some of the largest emerging markets energy importers was also a factor behind the sell-off, said Julian Mayo, chief investment strategist at Fiera Capital, an investment management firm.
"The one concern is higher oil prices, which is a worry as most of the emerging markets are big oil importers," he said. "South Korea, China, Taiwan and India make up around 60 percent of the MSCI Emerging Markets Currency Index."
Brent prices rose above $75 per barrel on Thursday for the first time this year as supply worries stalk oil markets. The United States this week said it would end all exemptions for sanctions against Iran, Opec's third-largest producer, demanding countries halt oil imports from Tehran from May or face punitive action from Washington.
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