The U.S. dollar bounced to a fresh 14-month high on Tuesday after spending much of the session in modestly negative territory.
Still, emerging-market currencies, led by the Turkish lira, which had plunged in recent days, retraced some losses.
The greenback, which trended higher against most of its rivals, added a modest 0.2%, measured by the ICE U.S. Dollar Index DXY, +0.42% which last stood at 96.624. This was a level not seen since June last year.
Even during the time the buck spent in negative territory of late, it held above the key level of 96, indicating that the dollar remains broadly supported as investors eye the next Federal Reserve interest-rate hike expected for September — only six weeks away.
A broader-based dollar index, the WSJ Dollar Index BUXX, +0.06% which measures the buck’s strength against 16 rivals including the lira, was little changed but also in positive territory at 90.42.
Among the day’s economic news, U.S. import prices for July showed a rise of 0.1%, while household debt moderated to 3.5% in the second quarter from 3.8% before.
Elsewhere, the Turkish lira rebounded against the U.S. dollar on Tuesday following an intense few sessions of unraveling that has sparked concerns of economic contagion from Turkey.
Most recently, the Turkish lira USDTRY, -5.8624% was up sharply against the dollar and the euro EURTRY, -6.4641% One dollar bought 6.4777 lira, down from 6.8846 late Monday in New York, dropping more than 6%. Meanwhile, a euro bought 7.3366 lira, versus 7.9079 lira in the previous session.
The Turkish selloff came on the back of a mix of economic and political factors, including high inflation and a large foreign debt burden, but also its strained relations with the U.S. over the detention of evangelical pastor Andrew Brunson.
Turkish President Recep Tayyip Erdogan blamed “economic terrorists on social media” for disseminating alleged disinformation about the state of Turkey’s economic condition, during Monday speeches.
Don’t miss: How the lira selloff compares to Turkey’s previous crises
Also Monday, the Central Bank of the Republic of Turkey introduced measures to boost liquidity in the market. But investors appeared to brush off those efforts, remaining concerned about that country’s economic health. Over the weekend, a defiant Erdogan said he had no intention of hiking rates in the country, something that economists and critics feel is needed to alleviate pressures from the rapidly declining currency.
Check out: Strategists see 4 ways out of Turkey’s currency crisis
The lira has dropped more than 40% against the dollar so far this year, including almost 25% in August alone, according to FactSet data.
Other emerging-market currencies, which had fallen in sympathy with the Turkish lira as investors feared a spillover, also have moderated losses and turned higher.
The South African rand USDZAR, -1.1214% and Mexican peso USDMXN, -0.5639% were both strengthening on the day, with one dollar fetching 14.2578 rand versus 14.4201 late Monday, and 19.0005 Mexican pesos versus 19.1161 pesos a day earlier.
Although some expressed concerns that Turkey’s problems could portend difficulties across emerging-market currencies, which tend to maintain high dollar-denominated debts, others suggest that Ankara’s woes, including inflation and an autocratic leader, are more country specific.
“We don’t doubt that some, or even many of these problems can be found in other countries but, for the most part, we think the problems are pretty specific to Turkey. Perhaps the only one that might require monitoring is the external borrowing issue as US rates rise and the dollar strengthens,” wrote Steven Barrow, currency and fixed-income strategist at Standard Bank, in a Tuesday research note.
Countries that maintain a significant amount of debts denominated in dollars and that use local currencies to service those obligations can run into troubles when the greenback’s value escalates rapidly.
Emerging markets have been a focus of concern for investors this year given that the dollar index has advanced by 4.6% in the first eight months of 2018 after declining by 10% last year. Moreover, the Federal Reserve is expected to increase rates twice more before the end of the year, perhaps providing a further boost to greenback at a time when few other countries are tightening monetary policy as aggressively.
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