By Dhara Ranasinghe at CNBC.com
It's been another week of bloodshed in emerging markets, with the Brazilian real, South African rand and Turkish lira all pummelled to record lows as China growth concerns and uncertainty about U.S. rate hikes continue to bite.
Remarks by U.S. Federal Reserve Chair Janet Yellen late Thursday suggesting the central bank could still raise rates this year sparked fresh selling on Friday, with the Malaysian ringgit and Indonesian rupiah falling to their lowest levels since the Asian financial crisis in 1998.
"EM currencies are being squeezed between concerns about the severity of China's economic slowdown and increasing uncertainty regarding U.S. monetary policy," Nicholas Spiro, managing director at Spiro Sovereign Strategy, told CNBC.
"Country-specific vulnerabilities, notably in Brazil and Turkey, are also weighing on sentiment – indeed more so than external factors in the case of many EMs," he said.
A rout in Brazil's currency – what has shed almost 10 percent this month and almost 60 percent this year – against a backdrop of a political crisis and an economy mired in recession, has also soured sentiment towards other emerging markets.
"In short, the world is not falling apart. Yet for EM, Brazil is vital," analysts at Standard Bank said in a note. "Too big to fail but not big to save. IMF (International Monetary Fund),would you please step in and save us all?"
To stem the slide, Brazil's central bank on Thursday warned it would use its foreign exchange reserves to defend the currency. These strong words bought some respite to the real, which bounced more than 5 percent and off a record low of about 4.248 per dollar hit earlier on Thursday.
Brazil isn't the only country bank taking action to shore up a battered currency. Indonesia's central bank on Friday said it will announce new steps to increase onshore supply of dollars – part of a move to support the rupiah, which has shed about 20 percent of its value this year.
"What happened yesterday was that we had a classic central bank warning from Brazil which is similar to rate hikes in Turkey in 2014 and a rate rise in Russia late last year amid a ruble crisis," Piotr Matys, emerging market currency strategist at Rabobank, said.
"Speculators should be aware that there are tools out there that central banks can use to prop up their currencies, but nevertheless the outlook remains fragile, especially because of China."
Emerging markets have fallen out favour with investors fast this year as global markets brace for the Fed to embark on monetary tightening for the first time in almost a decade and concerns about China's economy grow.
But the drubbing has gathered pace this week– a move analysts attribute to the Fed highlighting global growth concerns at last week's policy meeting and fresh signs of weakness in China, the world's second biggest economy and long a key driver for growth in many emerging markets.
Data on Wednesday showed factory activity in China fell to a six-and-a-half-year low in September, sparking renewed selling in emerging market currencies.
The South African rand hit a record low of 14.0860 to the dollar on Thursday, and the Mexican peso fell to an all-time low of 17.3165 per dollar.
"The sell-off in emerging markets is quite concerning and the pace looks worrying," said William Jackson, a senior emerging markets economist at Capital Economics, in London.
"From an economic perspective, weak currencies are bad for those countries with high inflation or foreign currency debt," he said.
Countries that remain vulnerable include Brazil, South Africa and Turkey, analysts said. Brazil's central bank on Thursday lifted its 2016 inflation forecast to 5.3 percent from 4.8 percent. A weak currency raises the cost of imports and, in turn, prices.
"There are simply too many domestic and external risks undermining confidence," he said.
"A lot would have to go right (or at least improve) in China and U.S. monetary policy for this to happen, to say nothing about the underlying country-specific woes in EMs which are the real concern."