The soaring dollar whacked emerging market currencies yesterday with Turkey's lira plumbing record lows as markets tested policy makers' response. The dollar index surged to a five-month high after U.S. Treasury Secretary Steven Mnuchin said the world's two largest economies had dropped their tariff threats while they worked on a wider trade deal , putting any trade war on hold.

That put pressure on emerging market currencies with Turkey at the center of the storm as markets seemed to test how much more lira weakness the central bank would tolerate. The lira dropped as much as 1.6 percent to a record 4.5586 to the dollar. The currency has lost some 17 percent so far this year, roiled by a combination of large external financing needs and double-digit inflation.

"The central bank issued a statement last week when the lira was 4.50 to the dollar, saying they were monitoring developments closely, but clearly this is not enough to stop the lira weakness in such an inopportune environment," said İnan Demir, senior emerging economist at Nomura International. "What could stop this is probably a bold action by the central bank - a significant move higher in policy rates in an inter-meeting decision, without waiting for the scheduled MPC meeting, but it doesn't look very likely."

South Africa's rand hit a five-month low early in the day, then trimmed some of its losses to trade 0.4 percent weaker after the government said it struck a three-year wage deal with public-sector unions, granting modest salary increases just above inflation in an attempt to tame its budget deficit .

Russia's rouble was treading water after central bank chief Ksenia Yudayeva said the recent rouble weakness would only marginally affect inflation. Reasons existed both to cut and to leave interest rates unchanged at the bank's next policy meeting, she said.