INDONESIA'S central bank raised interest rates yesterday in a bid to shield the slumping rupiah from a sell-off in emerging market currencies as Turkey's financial crisis roils global markets.
Bank Indonesia raised its benchmark rate to 5.5 per cent from 5.25 per cent, its fourth hike since May, after the rupiah this week dropped to its lowest level against the US dollar since 2015.
Investors have been dumping emerging market currencies, including the rupiah, as rising US interest rates prompt them to flock to dollar-denominated assets in search of better returns.
But a plunge in the Turkish lira has sent shivers through global markets and heaped more pain on emerging units.
Yesterday, the Stock Exchange of Thailand (SET) Index fell 1.12 per cent to close at 1,676.29 points.
Concerns about the health of Turkey's economy were already pressuring the lira, which slumped on Friday and Monday as US President Donald Trump announced Washington was ramping up aluminium and steel tariffs.
Indonesia's central bank said its latest rate rise was partly driven by the Turkey crisis.
"We are closely watching what's happening in Turkey," bank governor Perry Warjiyo said after the rate announcement. "Global economic uncertainty has been rising due to the ... turmoil in Turkey."
The rupiah slumped to its lowest point since 2015 on Monday after Indonesia reported its biggest current account deficit in nearly four years. The current account is a broad measure of a country's trade with the rest of the world.
The rupiah was trading at 14,576 against the US dollar yesterday, down more than 7 per cent since the start of the year.
Crisis weighs on Asian shares
Alongside the SET in Bangkok, stocks were weaker in most major Asian markets yesterday, with Turkey's financial crisis showing little sign of abating as Ankara imposed tariffs on several US goods in a tit-for-tat move.
Following a day of gains on Tuesday, investors were again in a bearish mood, driving down markets in Tokyo, Hong Kong and Shanghai, but the Turkish lira was spared the freefall of recent sessions.
The main Japanese market, the Nikkei 225 Index, erased early gains to close 0.68 per cent down on the day, giving back some of the ground made on Tuesday when it jumped by more than two percent.
The Hang Seng Index in Hong Kong was off more than 1.5 per cent and the losses were even deeper in Shanghai, which was in the red by more than 2 per cent as disappointing economic data continued to weigh on the market.
The Turkish lira avoided the kind of dizzying drops seen in recent days but still experienced some frantic trading when Ankara announced a rise in tariffs for certain US imports.
Turkey's vice president said the hikes were ordered "within the framework of reciprocity in retaliation for the conscious attacks on our economy by the US administration", as the war of words between the two NATO allies intensified.
Rodrigo Catril, senior foreign exchange strategist at National Australia Bank, said the Turkey crisis was likely to go on for some time.
“It is hard not to see the lira remaining under pressure until we see a material fiscal restraint to cool down the economy, along with a measurable lift in rates by the central bank and a diplomatic resolution to US tensions,” said the analyst.
The Turkish unit had been under pressure for weeks over growing concerns about the health of the economy but the currency slumped on Friday and Monday, when Trump announced Washington was ramping up aluminium and steel tariffs.
In late Asian trading, the lira was at 6.2050 against the dollar, having recovered significantly from the record lows of 7.24 seen on Monday.
Traders fretted that Turkey's woes could spark contagion into other emerging currencies and also that banks in advanced nations could suffer due to exposure to the Turkish economy.
"While the lira is stabilising, investors are still concerned that the crisis will spread to other emerging economies and currencies," said Hikaru Sato, senior technical analyst at Daiwa Securities. “Trading is expected to remain nervous for now."
However, not all was doom and gloom in Asian markets, with Seoul's Kospi and the main Australian market up around 0.5 per cent.