Is Turkey’s currency crisis about to go global?

Turkey’s currency crisis could be about to go global, leading to a rout in emerging markets that would have a devasting effect on the world economy.

The Turkish lira has fallen 40% against the dollar in recent months, driven by a diplomatic row with the West and current account deficit that has triggered a currency meltdown.

The plunge in the Turkish lira has set off a wave of selling across emerging market assets, “reviving fears of contagion that has been the sector’s Achilles heel for decades”, says Reuters.

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Earlier this week India’s currency fell to an all-time low, reaching 70 rupees against the US dollar, while the South African rand and the Argentinian peso have also seen big drops in recent days.

The devaluation of the rupee has led to fears the Fragile Five economies, comprising of Brazil, India, Indonesia, South Africa and Turkey which overly rely on growth fuelled by foreign investment, “may be again treated as one asset class by investors [which] could trigger further capital flight from the countries, sparking a contagion that could spread throughout global markets”, says the Daily Telegraph.

“The timing couldn’t be worse for emerging markets” says Market Watch, with many already struggling with the prospect of trade wars, as well as a strengthening US dollar and rising US interest rates.

Highlighting the “spreading turbulence” among emerging markets, the Financial Times says Indonesia’s central bank reportedly intervened to support the rupiah, while Argentina’s central bank unexpectedly lifted its main interest rate by another 5 percentage points to 45%. The unexpected rise came after the Argentine peso had fallen for a sixth consecutive day to hit a record low against the dollar.

Some analysts believe differences between the Fragile Five economies make widespread contagion less likely, with Christian Maggio, head of EM strategy TD Securities, describing the Turkey crisis as “largely idiosyncratic”.

But even idiosyncratic problems can cause a chain of dominoes to fall, warned Scott Minerd, global chief investment officer at Guggenheim Partners, who called on investors not to be complacent.