Lira, Indian rupee at forefront as Syria tension pounds emerging assets

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SummaryBond yields have risen across the board.

The United States and its allies appeared to be gearing up for a military strike against Syria, perhaps within days, as punishment for last week's chemical weapons attacks which they have blamed on President Bashar al-Assad's government.

The Turkish lira and the Indian rupee - already under heavy pressure due to their large current account deficits and an imminent rollback in U.S. money printing - were at the forefront of selling, with both hitting new record lows as oil prices surged to six-month highs above $117 a barrel.

The higher cost of oil will make it even more difficult for the two energy importers to contain their current account gaps.

"Syria is raising the level of uncertainty and those closest to Syria such as Turkey will be on the receiving end of the selling," said Ashok Shah, CIO of asset manager London & Capital. "It's another round of bad news."

"In (energy-importing) countries such as India, if you look at the oil price in rupees you can see how they are getting impacted - it's a double whammy for them."

The rupee tumbled 3.6 percent to 68.80 per dollar, its biggest one-day fall in 18 years, bringing 2013 losses to 20 percent. The lira fell 1.6 percent, while Turkish credit default swaps inched to new 14-month peaks.

The Syrian crisis has aggravated a selloff in emerging market assets that was triggered by expectations the U.S. Federal Reserve will start scaling back its massive stimulus program, as soon as next month.

U.S. stimulus had flooded developing economies with cheap cash and concerns those flows may now reverse are especially hitting the currencies of countries with large funding gaps - India, Turkey, Brazil, South Africa and Indonesia.

As the Middle East prepared for the impact of a strike on Syria, stock markets in the region plunged and the Israeli shekel extended losses, easing to a near three-month versus the dollar.

One of the best-performing emerging currencies this year, the shekel has shed almost half its 2013 gains on concerns that U.S.-led action in Syria may lead to wider conflict in the area.

Emerging currencies are so far shrugging off central banks' efforts to stem the rot and in Turkey investors have taken the central bank's refusal to aggressively raise rates as a green light to sell the lira.

"The lira is just going one way unless the (central bank) reveals its hand more clearly - it needs a bit ticket interventionist plan," Standard

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