Euro, emerging markets wilt as Turkey rout drives investors to seek safety

LONDON, August 13

The euro slid to a fresh 13-month low, emerging market currencies slumped further and the yen surged to a six-week high on Monday as the fallout from the Turkish lira's crash sent investors into safe-haven currencies.

As investors dumped riskier assets and worried about contagion, emerging markets reeled. South Africa's rand was down 2.7 per cent after falling more than 10 per cent in earlier trading, Mexico's peso was 2 per cent lower and the Russian rouble was down a more modest 0.8 per cent.

Turkey's lira rebounded on Monday from record lows after the central bank pledged to provide liquidity and cut reserve requirements for banks, but the currency was still down around 10 percent on the day. It has shed more than two-fifths of its value in 2018.

"The big fear in the market is that we are headed for a full-blown emerging market crisis," said Ulrich Leuchtmann, a Frankfurt-based strategist at Commerzbank, citing the 1997 Asian financial crisis when even countries with a sound macroeconomic position were sucked into a deep sell-off.

Leuchtmann said he believed the market was "fundamentally in a different position" today because many emerging market central banks retained the confidence of investors after hiking interest rates over the past year.

But a scramble into currencies deemed safer, such as the yen, underlined investor nervousness.

The euro fell to as low as $1.1365, a 13-month low, before recovering slightly.

Analysts said most of the euro weakness was down to dollar strength but worries about the impact on European banks of the Turkish slump, despite the relatively limited exposure of most big lenders, had also played a role.

Investor nervousness over political uncertainty in Italy is also weighing on the euro.

The dollar, which has rallied since the lira crisis exploded, gained 0.1 per cent to 96.463 against a basket of major currencies, just below its 13-month high of 96.522.

The Swiss franc jumped to 1.1288 to the euro, within a whisker of a one-year high against the currency, but was little changed versus the dollar.

The franc is typically bought by investors in times of market flux but Societe Generale strategist Kit Juckes said the market would need to see "pretty serious risk aversion" to boost the franc against a rallying dollar.

The yen surged half a per cent against the dollar to 110.35 after earlier hitting a six-week high of 110.11.

The euro slipped 0.8 per cent against the yen to 125.55 , close to a 2-1/2-month low of 125.15. 

Contagion fears

The most striking moves were in emerging markets as the Turkish lira's rout rippled outwards.

Investors have grown increasingly concerned about President Tayyip Erdogan's growing control over the economy and a deepening diplomatic rift with the United States, with those concerns snowballing into a market panic last week.

The lira hovered at around 7 lira per dollar on Monday, down nearly 10 per cent on the day.

China's yuan dropped 0.4 per cent in offshore markets to 6.8942 yuan per dollar.

The Indian rupee and Indonesian rupiah also weakened, down by 1.5 and 0.8 per cent, respectively.

BNY Mellon's chief currency strategist Simon Derrick said that without more meaningful action from Turkish authorities, there would be renewed pressure on the lira.

“With signs of contagion already starting to emerge elsewhere ... in a fragile August market, the worry must be that risk aversion returns very rapidly,” Derrick said. Reuters