Few options for EM c.banks to stem forex strength

By Sujata Rao - Analysis

LONDON (Reuters) - Rising relative interest rates next year will likely force many emerging central banks to take more measures to stem relentless currency appreciation caused by yield-chasing investors.

Most analysts say the recent market shakeout that knocked many emerging currencies off multi-month highs last month will provide only a brief respite to central banks that have since March watched currencies soar, in some cases by over 30 percent.

The persistence of near-zero interest rates in some of the biggest developed countries -- the United States, the euro zone, Japan, Britain and Switzerland at least -- are ensuring the hunt for yield across a spectrum of emerging assets will likely continue for some time.

To be sure, appreciation is most prominent in Asia and Latin America, with many emerging European economies held back by banking concerns and current account deficits. But broadly, the trend has impacted established units like the Brazilian real and Korean won as well as frontier assets like the Kenyan shilling.

Alarmed central banks are contemplating a range of measures to hold back the tide -- Brazil last month slapped a 2 percent tax on financial inflows while South Africa loosened exchange controls allowing corporates to hold cash overseas.

Talk of controls has surfaced from Turkey to South Korea either by taxing investments or by curbing lending from overseas, and Brazil is expected to propose a "joint response" to speculative capital inflows at the G20 meeting this weekend.

And the recent retreat of up to 8 percent in some emerging currencies does not mean the end of the story.

"The debate over capital controls will resume to an extent we have not seen in the past decade," says Shahin Vallee, strategist at BNP Paribas in London. Emerging markets "will be on a (rate) hiking path pretty much across the board which will lead to more inflows as G3 will be on hold for a while yet."