TOKYO -- From Argentina to Indonesia, emerging-market currencies are swooning.
Turkey and South Africa failed to prop up theirs with interest rate hikes. Now the Turkish lira is trading near an all-time low against the dollar.
Bill Gross, founder and chief investment officer of money manager Pimco, on Jan. 29 summed up the situation in a tweet: "Turkey & South Africa flunk currency test -- don't wait around to see who's next. De-risk, move to Treasurys."
The U.S. Federal Reserve's winding down of monthly asset purchases, while partly to blame for this turmoil, is a step toward normal central bank policy. The global financial crisis, which struck more than five years ago, forced it to flood the U.S. economy with dollars. But there were so many dollars that a lot of them flowed into developing nations where high interest rates meant they could earn more. Now the world is waiting to see how well these economies endure the jolts as the wind-down continues.
With the U.S. enjoying a decent run of growth, the Fed has the freedom to ease back toward normalcy. As it begins in this direction, though, those easy dollars that flowed into emerging markets are also making U-turns. This has even upset equity markets in developed nations.
Laurence Fink, chairman and chief executive officer of BlackRock, in January told the World Economic Forum that he was hearing "too much narrative on tapering (Fed-speak for scaling back its aggressive dollar-printing) as a cause of the unrest" in emerging markets.
"By and large, a lot of the unrest is (being caused by) bad domestic policy in some of these countries," the head of the world's biggest asset management institution continued.
Emerging markets each have unique challenges, such as China's opaque "wealth management products" and India's unhealthy mix of low growth and inflation. But all need structural reforms if they are to withstand painful dollar withdrawal symptoms.
Ben Bernanke, chairman of the Fed until earlier this week, hinted in May that a reduction in bond buying was on the horizon. It was a warning that apparently went unheeded by emerging markets now being hit by a triple sell-off in their stock, currency and bond markets.
They are now busy trying to win back investor confidence.
The relative stability of South Korea's financial markets contrasts sharply with Indonesia's rough ride. Hardened by the Asian financial crisis of the late 1990s, South Korea honed its competitive edge in exports and became a steady earner of current-account surpluses. Indonesia, hit by the same currency crisis in 1997, allowed deficits to set in.