Lira, rand back on the rack as Fed keeps markets on edge

Wed Jan 29, 2014 10:40am EST
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By Marc Jones

LONDON (Reuters) - Turkey's lira and other emerging market currencies were back under pressure on Wednesday as expectations the Federal Reserve will press on with stimulus cuts later in the day reheated doubts over developing markets' appeal for investors.

The Turkish central bank's massive 425 basis point interest rate hike overnight had stirred hopes of breaking the vicious cycle of selling in emerging markets and reviving risk appetite.

But the cracks were quick to reappear in another turbulent session in Europe. The lira gave back all of an earlier 3 percent surge, stocks in Istanbul slumped and South Africa's rand dropped despite a rate hike by its central bank.

"Certainly a bit of shock and awe on the rate hike but you do have to wonder, if this doesn't work in arresting the decline in the lira, what other measures the Turkish central bank has?" said Michael Hewson senior analyst at CMC Markets.

"Do you jack up rates again? ... My big concern is they start talking about capital controls."

With markets once again in a volatile state and the U.S. Federal Reserve expected to press on with cutting back its huge stimulus later in the day, it looked to be a hectic few hours ahead for traders.

Recently polled analysts had not expect South Africa to move rates, but Turkey's massive hike which had come after an Indian rate increase on Tuesday, left it with little option if wanted to protect its currency from further trauma.

European shares had initially ridden the wave of optimism that spilled in from Asia, but Britain's FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC 40 .FCHI were all in deep negative territory as U.S. trading began.   Continued...

Turkish 5 lira banknotes are seen in this illustration picture taken in Istanbul January 28, 2014. REUTERS/Murad Sezer