India, Brazil, other emerging economies hit by currency rout

Mon Aug 19, 2013 3:35pm EDT
 
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By Subhadip Sircar and Walter Brandimarte

MUMBAI/RIO DE JANEIRO (Reuters) - The Indian rupee plummeted to a record low against the dollar on Monday, leading a rout by Brazil's real and other emerging market currencies seen by investors as the most vulnerable to an exodus of foreign capital.

A fierce selloff in many emerging currencies shows no sign of abating as the expected withdrawal of U.S. monetary stimulus prompts investors to shun markets seen as riskier because of funding deficits, slowing economies and inflation.

The rupee fits that bill, as do the Indonesian rupiah, the South African rand and the Brazilian real. The rupiah plunged to four-year troughs on Monday while the rand lost another 1 percent to bring year-to-date losses to almost 17 percent against the dollar.

Brazil's real extended last week's fall of more than 5 percent fall to trade at its weakest level since March 2009 even as the central bank sold nearly $3 billion worth of currency swaps, which are derivatives that mimic an injection of dollars in the futures market. Like the rupee, it has been hammered by doubts over the efficacy of policy actions to stem the rout.

The rupee and the real, respectively, have been the worst performers in Asia and Latin America since late May when the Fed first signaled that it may begin winding down its monetary stimulus this year. India's currency has lost 13 percent against the dollar this year while the real has plunged 15 percent in the same period.

A decline in the Fed's bond purchases will push government debt yields higher, which should raise the attractiveness of the dollar and dollar-denominated assets.

In Brazil, the currency weakness has complicated policymakers' efforts to rein in inflation, leading many investors to bet the central bank may speed up the pace of monetary tightening next week.

In India, the rupee's sell-off threatens to drive Asia's third-largest economy towards a full-blown crisis.   Continued...

 
A private money trader counts Indian Rupee currency notes at a shop in Mumbai August 1, 2013. REUTERS/Vivek Prakash