Emerging markets faced intense pressure on Thursday after the US Federal Reserve cut its stimulus further, with currencies in India, South Africa and Turkey failing to rally despite interest rate rises.
Asian shares fell heavily and European stocks also retreated, extending a global rout driven by worries about emerging markets.
Concerns were stoked when the US central bank further reduced its quantitative easing (QE) stimulus overnight.
Wall Street sank on Wednesday after the Fed said it would reduce its bond-buying programme by $10 billion to $65 billion per month, citing a pick-up in the US economy.
That followed a similar announcement in December.
Investors took flight as the news stoked fears of capital flows from emerging markets that have benefited from the Fed’s cheap money policy, hitting nations with large current account deficits, as dealers look for safer investments back home.
The Turkish lira fell to 2.2661 against the dollar as the Fed news overshadowed a big interest rate rise.
Turkey, where political upheaval is fuelling market fears, doubled its interest rate to 10.0 percent late on Tuesday giving short-lived support to the currency which has fallen by around 10 percent in recent weeks..
South Africa’s Rand currency edged up against the dollar, but still languished close to a five-year dollar low, one day after the central bank announced a half-percentage-point rate rise.
“Rate hikes in Turkey and South Africa have failed to lift their beleaguered currencies as investors fret about the adverse impact on growth in both countries, adding to nervousness in emerging markets,” said Nick Stamenkovic at RIA Capital Markets in London.
“Emerging market countries suffering from sizeable current account deficits are heavily dependent on capital inflows which are being undermined by the Fed?s tapering of QE,” he added.
A country’s current balance of payments measures all regular payments into and out of the economy and the currency, and is a key factor in long-term confidence.
“Emerging market volatility looks set to continue amid ongoing uncertainty about the impact of continued moderate Fed tapering and slowing Chinese growth,” said Stamenkovic.
The ruble meanwhile plunged to a historic low of 48.20 to the euro in early trading on mounting speculation that Russia’s central bank may delay a planned 2015 free-float of the currency because of its rapid decline, before picking up modestly.
The Indian government vowed on Thursday it would take whatever steps necessary to ensure stability in its financial markets.
India has lifted rates a modest quarter-point to slow inflation, but the move has had only a brief impact on the rupee, which closed near a two-month low hit on Monday.
The dollar and euro sank against the yen as dealers sought safer investments, while sentiment took a further blow from data confirming Chinese manufacturing contracted in January.
Tokyo stocks dived 2.45 percent and Sydney shed 0.78 percent. Hong Kong lost 0.48 percent in half-day trading before the Chinese New Year holiday.
In afternoon European trade, London’s FTSE-100 index was down 0.31 percent to 6,523.81 points, Frankfurt’s DAX had also slid 0.31 percent to 9,307.41 and in Paris the CAC-40 was off 0.41 percent to 4,139.97.
The euro was down to $1.3591 from $1.3662.
In New York on Wednesday, the Dow fell 1.15 percent, the S&P 500 1.01 percent and the Nasdaq 1.14 percent.
No quick resolution in sight, analysts warn
Trader Markus Huber, at brokerage Peregrine & Black, cautioned that the turmoil could persist for some time.
“No doubt there could be more turmoil in emerging markets ahead,” Huber told AFP.
“However it needs to be seen how major central banks, world politicians and major institutions like the IMF and World Bank will react to the situation should things worsen dramatically,” he added.
Economist Neil MacKinnon at Russian firm VTB Capital, described the outlook as “poor” for emerging nations, adding that rate increases were “unsustainable” and hurt growth.
“It is poor fundamentals rather than Fed tapering which is keeping pressure on” countries like Brazil, India, Indonesia, Turkey and South Africa, which investors have taken to calling the fragile five.
“Raising interest rates to defend currencies is not sustainable given the impact on those countries’ economic growth,” he added.