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Sep 05, 2013, 06.26 PM IST | Source: Reuters

EMs to fight alone against further forex falls: Poll

The U.S. Federal Reserve's move toward trimming its stimulus has triggered a sell-off in emerging market currencies and a flight to the dollar, resulting in a round of interventions and monetary policy moves from Istanbul to Mumbai to prop them up.

EMs to fight alone against further forex falls: Poll

Emerging nations are unlikely to join forces to intervene in foreign exchange markets in the next few weeks to prop up their ailing currencies, even though there is more pain ahead, a Reuters poll predicted.

The U.S. Federal Reserve's move toward trimming its stimulus has triggered a sell-off in emerging market currencies and a flight to the dollar, resulting in a round of interventions and monetary policy moves from Istanbul to Mumbai to prop them up.

The survey of over 50 leading foreign exchange strategists showed deep skepticism about India's plans to seek support for coordinated offshore intervention, with analysts saying each developing country will fight their own battle against further falls.

Indeed, the probability of joint intervention by emerging-nation central banks within the next few weeks is just 15 percent, according to the poll consensus. Only three institutions said the likelihood is greater than 50 percent.

"I see India is suffering a lot, but this affects other nations in very different ways, and each one of them has different needs. I'm very skeptical about joint action," said Newton Rosa, chief economist at SulAmérica Investimentos, a Brazilian asset management firm owned by Dutch bank ING Group.

The Reuters poll results come as leaders and policymakers from the Group of 20 developed and emerging nations meet this week in St. Petersburg, Russia, with the effects on the global economy from the Fed's pull-back high on the agenda.

Reuters reported exclusively last month that India was seeking support from fellow emerging market countries for coordinated intervention but had received little public backing from other nations.

The Indian rupee has lost nearly 20 percent to the dollar this year, hitting record lows almost daily since end of May, when Fed Chairman Ben Bernanke hinted at a stimulus rollback.

However, the need for urgent action seems to be lower in Brazil than in India.

After a near 20-percent plunge in its currency from May to mid-August, Brazil has announced a huge intervention program with up to $60 billion in derivatives and repurchase agreements by year-end, and has been successful so far in stabilizing the real.

"Each country has it own currency intervention strategy. For example, India and Argentina adopted capital controls, while Brazil offered currency swaps," said Adriano Beuren, an economist with Banco Sicredi, in Porto Alegre, Brazil.

"The need for foreign money is different in each country. That creates difficulties for a deal."

Economists in Brazil were particularly skeptical of such a move following comments by Finance Minister Guido Mantega that the largest Latin American country, one of the most affected by the emerging currency rout, was not involved in any plans to intervene in offshore foreign exchange markets.

What has kept leading emerging countries busy, Mantega said, are plans to create a bank and a reserve fund by the BRICS group - including Brazil, Russia, India, China and South Africa.

China's deputy central bank governor, Yi Gang, also called on Wednesday for China and other Asian countries to broaden the use of regional currencies in bilateral trade and investment settlements and close more currency swap deals to facilitate capital flows.

The Fed is expected to start reducing its $85 billion per month bond-buying programme when it meets on September 17-18, according to all nine of the Reuters polls of economists conducted on the subject.

If the Fed goes ahead with its plan then emerging market currencies are expected to trade lower, according to 30 of 53 analysts polled. Another 13 said significantly lower, three said unchanged while the remaining seven said somewhat higher.

"There is probably still more downside for the emerging markets but they've been hit pretty hard already so there may not be that much more downside," said Benjamin Reitzes, a senior economist at BMO Capital Markets.

The global Reuters foreign exchange poll this week found the U.S. dollar is the only currency that stands to benefit in the near-term from that.

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