-- But some currency weakness may represent healthy corrections
-- Oil importers likely to stay in the firing line
By Siva Sithraputhran
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--Central banks in emerging markets look more and more likely to intervene on foreign-exchange markets as heightened nerves over the intensifying political crisis in the Middle East and North Africa cause a broad-based rush out of risky bets Tuesday, with a wide range of emerging-market currencies taking a hit.
Markets largely shrugged off the ructions in Tunisia, and showed relatively mild nerves over the overthrow of the Egyptian regime. But as the Libyan protests draw increasingly violent crackdowns from the under-pressure regime, investors are taking fright.
The sell-off Tuesday is indiscriminate, hitting currencies from Eastern Europe, South Africa, Turkey and Israel. Analysts agree that unless this proves to be a short-term blip, authorities across the region could launch foreign-exchange interventions to stabilize their currencies.
"Turkey may suffer, given its oil dependency and regional proximity. As the Turkish lira is now relatively cheap to [sell], we might need to see central-bank intervention to reduce volatility," said Charles Robertson, head of macro strategy at Renaissance Capital.
For now, the spell of emerging-market currency weakness is marked, but not panicky. At 1027 GMT, the Turkish lira was at TRY1.6004 against the dollar, just off its weakest level since the end of January. The South African rand was at ZAR7.2057, around its weakest level since Feb. 17, and the Israeli shekel was at ILS3.898, around its weakest in a week.
Investors are scaling back on the riskier assets they hold and markets as far away as Korea and Taiwan could be hit, especially as both are energy importers, Robertson at Renaissance Capital said, adding that India, Kenya and Asia may also be affected.
Any sustained currency weakness would push up import prices, stoking inflation--another factor that could provoke currency interventions across the region.
To be sure, a short blast of weakness would probably be welcomed. It may be "welcome relief" from recent currency strength and such a fall could be "healthy corrections," said Werner Gey Van Pittius, an emerging-markets fund manager at Investec Asset Management in London.
But large, abrupt or sustained currency slides would be a different matter, Gey Van Pittius added. "Central banks may have to act so that they can step away from imported inflation," he said, referring to the inflationary impact of weak currencies, which boost import prices.
The market's immediate concerns are on how far the political troubles will spread into oil-producing territories. There are already hints of trouble in Iran and Algeria. For investors, any sign it spreading to Saudi Arabia will be crucial.
"If Libya can overthrow its ruler, markets will assume that any ruler may now look unsafe," said Renaissance's Robertson.
-By Siva Sithraputhran, Dow Jones Newswires;+44-20-7842-9462; siva.sithraputhran@dowjones.com
