- Central banks in emerging markets are trying to curb wild swings in their currencies
- The amount of currency traded is not great
- They fear the global economy is slowing fast, with a risk of further shocks from the eurozone
The South Korean central bank surprised the markets on Friday with a $4bn lightning intervention in support of the won, carried out in the last two minutes of trading,
The day before, Brazil spent $2.75bn selling dollars in the currency swaps market to stop the rapid decline of the real.
Does this mean central banks in emerging markets are finally trying to reverse the sharp plunge in their currencies over the past month?
Probably not, currency strategists believe. Officials are primarily aiming to curb what they see as excessively wild swings in their currencies. They want stability, not appreciation.
The best evidence is that the amounts of money involved are not great. While emerging market central banks last week spent more than $7bn in support operations, few outside Korea and Brazil deployed very much. Taiwan, for example, spent $300m, Indonesia disbursed Rp1,740bn ($196m) buying government bonds and Peru spent $181m supporting the sol. Turkey put $300m into the lira.
They were nudging investors, not trying to frighten them into reversing the recent currency declines. For comparison, the Bank of England, admittedly operating in a much larger market, spent £27bn in its futile 1992 defence of sterling.
By the end of Friday, the won was still down 4.7 per cent on the week, the Brazilian real 8.6 per cent and the Turkish lira by 3.6 per cent.
Emerging market officials are not unhappy with the results, however much they might condemn the danger of currency wars, as Brazil's president Dilma Rousseff did in the Financial Times this week.
Emerging nations fear the global economy is slowing fast, with a risk of further shocks if the eurozone fails to resolve its crisis. Guido Mantega, Brazil's finance minister, said in an FT interview that he was satisfied with the real's current level (16 per cent down in a month). "The real is today at R$1.85 [to the dollar] ... There's nothing to be done."
Other countries are more cautious but the sentiment is widespread, not least in export-dependent Asian and eastern European economies. Officials recall that those countries that suffered most in 2008-9 were those with fixed exchange rates; those that allowed their currencies to fall, such as Poland, rode the recession by promoting exports and reducing imports.
Zaheer Imran Ahmad, a strategist at RBS, said: "Central banks are more tolerant of currency weakness now because of what happened after Lehman."
But is there an exception. Countries with heavy external borrowings cannot afford too much currency depreciation because it will increase the repayment burden. The dangers are especially serious for small export-oriented economies open to capital inflows. Korea is a case in point, with a ratio of external debt to gross domestic product of 43 per cent. In eastern Europe, Hungary on 174 per cent is very exposed.
Big tests lie ahead. With world markets still in turmoil, commodity prices are very volatile. The impact on many emerging economies, both exporters and importers of natural resources, will be more dramatic than on the developed world. Currencies are certain to respond.