Currency Reserves Come into Focus

Foreign exchange traders 'smell blood' as some emerging-market governments burn through foreign reserves in an effort to prop up their currencies.

Foreign-exchange reserves are emerging as the latest battleground between traders and developing nations trying to stem the worst rout in their currencies since 2008.

Nations with the smallest reserves to fend off currency speculators will continue to see their exchange rates under pressure, options prices show. Of the 31 major currencies tracked by Bloomberg, traders are most bearish on Argentina’s peso, Turkey’s lira, Hungary’s forint, Indonesia’s rupiah, and South Africa’s rand, while the forwards market signals that Ukraine’s hryvnia will fall 20 percent in a year.

Across the developing world, borrowing costs still aren’t high enough to protect the “weakest links” among emerging currencies, Citigroup strategists led by London-based Jeremy Hale wrote in a Feb. 6 client note.

“Vulnerable EMs face the risk of falling into a vicious circle,” the strategists wrote. “Weaker growth and higher rates could weigh on local asset markets” and “if this then leads to unwinds, capital outflows could lead to renewed currency weakness, which would require higher rates once again.”

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