Emerging market currencies hit multi-year lows as Turkish sell-off spreads  

Key Points
  • Turkish assets are under pressure over concerns about U.S. sanctions and the economy's management.
  • A sell off in the Turkish lira has led investors to sell other emerging market currencies.
  • The Turkish finance ministry and treasury has promised steps to support its economy and banks.
Contagion from Turkey into other EM currencies is the danger: Pro

The plunge in the Turkish lira has caused investors to take fright and sell-off other emerging market currencies.

The lira has lost more than 40 percent in value this year over fears about the handling of Turkey's overheating economy and a dispute with the United States over the fate of a jailed American pastor. However, concerns over the sell-off in lira has hit markets assets across the globe, including knocking emerging market currencies to multi-year lows.

The South African rand was the biggest affected, plunging by more than 10 percent at one point before recovering to sit at 14.51 versus the dollar. The rand is now weakened to levels not seen since 2016.

The Indian rupee weakened to an all-time low of 69.62 per dollar in early trade according to Reuters data before recovering to 69.695 following the actions of the Turkish central bank. Reuters also reported that the Indonesian rupiah touched its weakest level in nearly three years before the country's own central bank intervened to support the currency.

On Monday, 4:30 a.m. eastern, the lira traded down against the dollar at 6.78. It had earlier dropped to a fresh all-time low of 7.24, before paring some losses.

Turkey's President Recep Tayyip Erdogan 
Mike Hutchings | AFP | Getty Images

The mild rebound in value came after the Turkish central bank moved to improve liquidity during Asia afternoon trade. The central bank said it will closely monitor markets and prices and take all necessary measures to maintain stability. The Turkish Treasury also said Monday it would issue an unscheduled bond with a 91-day maturity "to diversify borrowing instruments and support financial markets".

"Turkey's problems are quite idiosyncratic and should be relatively well-contained outside of the obvious short-term risk-off," said Deutsche Bank's Jim Reid in a note Monday.

The macro strategist warned however that the situation could come to be regarded as a typical example of the volatility caused by major central banks withdrawing their extraordinary stimulus.

In stocks, Turkey's Bist 100 stock market hit its lowest level in dollar terms since March 2009 with banking equities particularly hit.

European banks hit by Turkey contagion

And in Europe, three of the largest Turkey-exposed banks, Unicredit, BBVA and BNP Paribas saw their stocks slip Monday morning as fears rose over how hard the lira's slide would make foreign currency debt repayments.

Turkey's economy is seen as particularly fragile due to its high level of debt that is priced in dollars. The more the lira weakens, the more expensive that debt becomes. The latest estimates from the International Monetary Fund (IMF) show that the total amount of Turkish debt payable in other currencies is more than 50 percent of the country's gross domestic product.

The Swiss franc, Japanese yen and Japanese government bonds have all witnessed buying as investors sought more security for their capital investment.