LONDON Emerging market central banks spending billions of dollars to defend their currencies risk depleting their reserves without much success as a deepening global financial crisis sends investors toward safe havens.
From the Korean won to the Turkish lira currencies are at multi-year, or even record, lows against the dollar, despite central bank action to stop them falling too sharply.
In Asia, the Indian, Thai and Philippines central banks have all waded into the market this month. Poland intervened for only the second time since the zloty floated while Brazil has sold billions of dollars worth of currency swaps.
Interventions were also seen in frontier markets from Sri Lanka to Tanzania.
But many are questioning the effectiveness of these actions. South Korea, for instance, spent $4 billion last Friday to defend the won but investors clearly used the currency's post-intervention strength to sell it down again.
Similarly, Russia's repeated daily dollar sales have succeeded only in briefly lifting the rouble off its lows.
"They will succeed in softening the depreciation but they can't win against the market," said Sebastian Barbe, head of emerging currency and debt strategy at Credit Agricole. "If there is more volatility in Europe, the selloff in emerging markets will continue."
Central banks may not be terribly upset that the prospect of weaker currencies as they provide a welcome boost to export competitiveness. After spending over two years soaking up dollars in foreign-exchange markets to prevent their currencies from rising too much, the banks are finding themselves having to sell some of that hard currency to do just the opposite.
But the pace and extent of the falls alarm policymakers.
As many unhedged bond investors bailed out of debt markets, the won has lost 11 percent this month against the dollar. Against the greenback, the Indian rupee is down 8 percent and the Polish zloty 13.5 percent. That kind of volatility is unpalatable to policymakers.
And there is very likely more to come. In Asia, pressure on currencies is rising due to dollar demand in non-deliverable forwards as investors rush to hedge against more currency weakness.
ING Bank said it had yet to see evidence of any unwinding of long margin trading positions held in emerging markets, raising the risk of a further substantial leg down for currencies should such capitulation occur.
"If you start to see more funds exit, this would swamp forex intervention by central banks. That's something to watch for," said Manik Narain, strategist at UBS in London.
This month's currency falls and central banks' dollar sales rekindled memories of 2008-2009 crisis when emerging economies lost up to a third of their reserves in a mostly futile effort to prop up exchange rates amid a massive investor exodus.
The central banks themselves have been keen to stress that recent interventions have been about smoothing out volatility rather than defending any specific exchange rate.
One thing is for sure. Emerging central banks certainly have the ammunition to support their currencies.
Since early 2009, Brazil's hard currency reserves have almost doubled, Polish and Turkish reserves are up by a third while Indonesia's have jumped an astonishing 77 percent -- a consequence of the commodity boom and huge portfolio inflows of the past 2-1/2 years.
Analysts agree the central banks have the financial means to intervene but their commitment is questionable. If commodity prices continue to fall and inflation pressures recede, some economies may be more willing to accept a greater degree of currency weakness.
"The central bank needs to be fully committed to it, deliver a very strong message, and not scared of burning a vast amount of forex reserves in the process," Benoit Anne, head of emerging markets research at Societe Generale said.
"As long as emerging-market central banks only intervene to smoothen volatility, it is likely the central bank action will not impress investors."
"Look at Russia -- they are burning huge amounts of dollars but the rouble is still at two-year lows."
(Additional reporting by Sebastian Tong; additional reporting and graphics by Scott Barber; editing by Anna Willard)