Emerging central banks step up currency support

Fri Sep 23, 2011 1:01pm EDT
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By Suvashree Dey Choudhury and Kim Yeonhee

(Reuters) - Central banks in Asia and Latin America redoubled efforts to defend their currencies this week as fears of slower global growth spurred investors to pull money out of emerging markets.

Anxiety rose after the Federal Reserve delivered a gloomy prognosis for the U.S. economy, spooking markets already on edge over a possible Greek default and euro zone bank crisis.

Investors responded by seeking safety in Treasuries and snapping up dollars, a move that pushed currencies from India, Brazil and elsewhere to multi-year lows.

South Korea stepped up its intervention to lift the won from its weakest level in a year Friday, though the currency was still headed for its biggest weekly loss since early 2009.

Central banks in Thailand and the Philippines also waded into the market this week while Indonesia went further and bought long-term bonds. India said Friday it was merely trying to calm volatile trade by buying the rupee, which hit a 28-month low against the dollar.

Earlier this year, emerging markets were fretting about excessive currency strength as investors seeking returns that were higher than what struggling developed markets could offer poured money into local currencies, stocks and bonds.

But while a strong currency can hurt exports, a sudden decline threatens to worsen inflationary pressure in these economies, which have been growing at a faster clip than developed economies in the United States, Europe and Japan.

Alexandre Tombini, Brazil's central bank chief, said officials were monitoring markets to assess the impact of a weaker real on inflation.   Continued...

<p>Prime Minister Stephen Harper talks to the media at U.N. headquarters in New York September 20, 2011. REUTERS/Jessica Rinaldi</p>