Emerging Mkts Currencies Crumble As Dollar, Yen Soar

The dollar soared in European trading hours Thursday, while emerging markets currencies came under excruciating selling pressure after the U.S. Federal Reserve tinkered with its portfolio maturities rather than

plunging into a fresh round of bond buying Wed.

        Setting the tone, Asian currencies plunged overnight, with Thailand, South Korea, Indonesia, the Philippines and Taiwan all thought to have intervened to try and bolster their currencies in response. The Korean won has previously plunged to its lowest level in a year, with the dollar pushing over 2% higher to above KRW1173. The offshore-settled yuan, known as the CNH, also plunged as investors scrambled to grab dollars wherever they could find them.

        "The Fed announcement provided little comfort to risk markets given elevated fears over the risk of renewed recession in the advanced economies, building global sovereign debt, and systemic banking risks," said Derek Halpenny, an analyst at Bank of Tokyo-Mitsubishi UFJ. "Investors are scrambling to cut [negative] dollar funding positions, as risk assets positions continue to be liquidated."

        The declines in Asian currencies left even seasoned market observers stunned. "The price action we have seen in the dollar against Asian currencies has been horrendous," said Paul Mackel, a currencies analyst at HSBC in Hong Kong. "It has undoubtedly been ugly. And that shows the liquidity we have at the moment."

        This tone continued through to European trading, with the South African rand and Hungarian forint taking big hits, while the Turkish lira sank to an all-time low against the dollar. By 1020 GMT, the dollar was at TRY1.83 against the lira.

        Salomon Sebbag, head of emerging-markets currencies trading at JPMorgan in London said that trading conditions across the emerging-markets space were distressed, with patches of very poor liquidity. "In some ways, this is worse than in '08, because the positions in emerging markets are bigger," he said.

        "Fundamentals now are a lot stronger than they were then, but for market makers, there is a lack of interbank liquidity, and the exits in the emerging-market currencies are not very big. What we would need to stabilize things now is some long-term players seeing good entry levels. We have seen a little bit of that, but for many, it's just too early," he added.

        For many major currencies, conditions were calmer, again because of stronger liquidity. But the euro nonetheless fell to a fresh seven-month low against the dollar under $1.35, while the pound also sank to a fresh eight-month low just above $1.54.

        Aside from the dollar, the yen was a big climber, edging back up towards record highs against the dollar, which dropped to Y76.15, and rushing higher in more unusual crosses. The pound sank to a record low of Y117.43, while the yen soared against currencies such as the Brazilian real and South African rand--up to now currencies that have been favored bets by retail Japanese investors.

        At 1030 GMT, the euro was at $1.3468 against the dollar, down from $1.3571 late in New York Wednesday, according to trading system EBS. The dollar was at Y76.44, down just a shade from Y76.46 late in New York. The euro was lower at Y103 from Y103.77. The Dollar Index was at 78.490 from 76.987.