• ACI Russia

08/17/1998 13:50:48 EMERGING MARKETS FX-Rouble fallout limited for now

By Mike Dolan LONDON, Aug 17 (Reuters) - The Russian rouble plunged up to 30 percent against the dollar following Monday's effective Russian devaluation, but dealers said the impact outside Russia and around east Europe has been muted so far. The Czech crown and Mexican peso suffered most in the intial aftermath of Russia's decision to abandon its rigid foreign exchange policy and allow the beleagured rouble to float freely. The disproportionate impact on the crown and the peso was mainly because these units are most freely tradeable emerging markets currencies and often are the first to feel the impact on emerging market sentiment in general, traders said. Many analysts reckon the fallout will spread as the week progresses. They said local currency Russian debt markets would suffer further as the joint effects of the devaluation and a simultaneous short-term debt moratorium take their toll on any remaining shred of confidence in that market. "This is a devaluation in progress and is not the end of the story. The risk is still very much to the downside for the rouble," said Claudio Demolli, emerging markets economist at ABN Amro in London. Following months of intense market pressure, Russian authorities on Monday said they would allow the rouble float freely and announced a potential downside limit of 9.5 per dollar between now and the end of the year. The central bank's previous policy had been to target the rouble in a range of 15 percent either side of an average 6.2 per dollar rate to the year 2000. That implied a 7.13 per dollar downside limit. Dealers said Monday's rouble fixing rate against the German mark on the Moscow Interbank Currency Exchange was 4.47 and equivalent to about 8.05 per dollar -- an effective devaluation from Friday's 6.35 rate of almost 30 percent. Rates quoted later however showed the rouble firmer about 7.0 per dollar. Continued pressure on the rouble was evident in the latest rise in official interest rates, however. Far from allowing interest rates to decline, the central bank was forced to raise its overnight credit rate to 250 percent from 150 percent on Monday. This is likely to keep pressure on the short-term rouble debt markets, which have been already been hit by the moratorium on paper maturing before 1999 announced by the government in tandem with the new rouble measures. Moreover, the whole situation is likley to heap more problems on the already devastated local banking system, analysts said. The impact overseas may take time to filter through. "This could change the landscape once again for emerging markets and Brazil and Mexico will now come under great pressure this week," said Demolli at ABN Amro. The Mexican peso was down more than one percent against the dollar compared with Friday's levels. The Czech crown was also down up to one percent at one point early in the session but steadied later about 18.33 per German mark. The Polish zloty recovered most of its early sharp losses, while the Hungarian forint held close to late Friday levels. "The impact on central Europe has been limited so far and in terms of the direct economic or trade links that exist between Russia and these countries, that's a reasonable reaction," said Andrew Kenningham, east Europe fixed income economist at Merrill Lynch in Lodon. "People now seem to see Poland, Hungary and Czech as being more part of western European markets, with their own story of convergence." However, the impact on central Europe may come from the indirect pressure that's likely to weigh on emerging market confidence worldwide. There is also the risk that funds who have made money in Poland or Hungary take profits in these markets to cover losses in Russia. Concern about devaluations in Brazil, China and Hong Kong will inevitably be fueled by Moscow's sudden climbdown on a "no-devaluation" policy, analysts said. Turkey and Ukraine could also experience direct contagion from currency competitiveness effects or from tremors from a crumbling Russian banking system, they said. Ultimately, the background risk of political upheaval in Russia may also act as an further drag on eastern and central European currencies. "The reaction overall is quite contained so far," said Demolli at ABN Amro. "But I think this is underestimating the potential impact further out." East Asian currencies were weaker, meantime, with dollar strength against the yen and continued concerns about the stability of the Chinese yuan and Hong Kong dollar continuing to weigh on sentiment. FOREX MARKET SNAPSHOT. The following is a snapshot of emerging markets currency rates. Double-click on currency codes for updated price quotes. * ASIA <AFX=> * Chinese yuan <CNY=> at 8.2799 vs 8.2799 on Friday. * New Taiwanese dollar <TWD=> 34.761 vs 34.702 * Indonesian rupiah <IDR=> 12,700 vs 12,900 late Friday * Malaysian ringgit <MYR=> 4.238 per dollar bid vs 4.2155 * Thai baht <THB=TH> at 41.70 per dollar vs 41.70 * Philippine peso <PHP=> 43.20 per dollar vs 43.00 * South Korean won <KRW=> at 1,333 per dollar vs 1,315 * Indian rupee <INR=> 43.12 per dollar vs 43.02 * EUROPE <EUROPEFX=> * Russian rouble <RUB=> quoted about 7.00 per dollar but estimated at closer to 8.05 per dollar bid vs 6.350 on Friday. * Zloty 7.45 percent above target basket parity vs 7.77 percent on Friday. * Mark/Czech crown <DEMCZK=> at 18.32 bid vs 18.195 * Slovak crown <DEMSKK=> 4.12 pct below target basket vs 4.20 percent Friday. * Hungarian forint <DEMHUF=> at 0.55 percent below basket parity versus 0.25 percent below Friday. * Ukrainian hryvnia <UAH=> at 2.153 er dollar vs 2.1495 * Romanian leu <ROL=> at 8,720 per dollar vs 8,730 * AFRICA <AFRICAFX=> & MIDEAST <MEFX=> * Israeli shekel <ILS=> 3.6751 bid on dollar from Friday's 3.6822 * South African rand <ZAR=> at 6.30 per dollar vs 6.33 * Kenyan shilling <KES=> at 59.85 vs 59.60 * LATIN AMERICA <LATAMFX=> * Mexican peso <MXN=> at 9.31 per dollar vs 9.20 * Brazil's real <BRL=> at 1.1720 per dollar vs 1.1715 ((London newsroom +44 171 542 6762, fax 583 7239, uk.emergingmarkets.news@reuters.com))

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