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The real casualties of China's market meltdown

The ripple effects from China's market drama is being felt far and wide. Among the hardest hit: emerging markets currencies.

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Currencies in Latin America, Eastern Europe and Asia were already under pressure this year, and China's meltdown is just the latest trigger for the selling.

"The trend in China-related news and in commodities is feeding into broader risk aversion, and this is making it very tough for emerging currencies," said Jens Nordvig, managing director of currency research at Nomura.

Brazil's real is the hardest hit of the year so far, down more than 20 percent against the U.S. dollar and sitting at its weakest value in 12 years. Turkey's lira is down 16 percent.

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Asian currencies like Malaysia's ringgit and Indonesia's rupiah are trading at levels last seen in 1998. They're values that trigger flashbacks to the Asian financial crisis, with the ringgit trading below the levels at which policymakers imposed a peg to the dollar and capital controls to stabilize a plunging economy.

A clerk stacks bundles of Indonesian 100,000 rupiah banknotes at a currency exchange office in Jakarta, Indonesia.
Dimas Ardian | Bloomberg | Getty Images
A clerk stacks bundles of Indonesian 100,000 rupiah banknotes at a currency exchange office in Jakarta, Indonesia.

The last time the rupiah was trading at these levels, Indonesia's economy was spiraling into chaos, including food shortages and political unrest, and the government was forced to negotiate a fourth rescue agreement with the IMF.

The fall in emerging markets currencies is very different this time around. Importantly, the currencies' falls have been more orderly and far less severe. Also, they're falling for very different reasons.

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This time, concerns about emerging markets revolve around a slowing Chinese economy, a possible Federal Reserve interest rate increase, and a sharp fall in commodities.

It's a triple whammy that threatens these economies. Many emerging economies, dependent on exports and commodity and raw materials sales to China, are facing pain from commodities' price declines and China's slowing growth and mysterious market swings. At the same time, they face the threat of capital outflows when the Fed raises interest rates for the first time since 2006.

Most strategists don't expect those factors to go away anytime soon and predict that pressure on emerging markets currencies will continue.

"Sentiment toward EM remains fragile, investor risk appetite will stay depressed in the coming months, and both domestic and external conditions favor weaker currencies, higher rates and steeper curves," wrote Kit Juckes, senior foreign exchange strategist at Societe Generale.

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"We expect further volatility and weakness ahead for most of emerging markets FX," wrote Win Thin, head of emerging markets strategy at Brown Brothers Harriman.

Thin says it's important though to distinguish between countries and regions when it comes to the selloff.

"In general we continue to favor Asia, with Europe, the Middle East and Africa next and Latin American last," Thin wrote.

But there is one thing that could stem the dollar's rise.

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"I think we need a clear signal from the Fed that they will delay liftoff for emerging markets FX to catch a break," Nomura's Nordvig said.

But he doesn't expect it at this point. "The Fed is not inclined to send such a signal in the short term, as they want to keep their options open for September," he said.

The only emerging markets currency that's actually in the green this year against the dollar? Russia's ruble. But the ruble lost 46 percent of its value in 2014, making it the biggest loser of all, and as oil has taken another leg down in the last few weeks, most of the ruble's 2015 gains have been wiped out.

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