A Rising Dollar Prompts a Fall in The Developing World’s Currencies

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The financial markets, if not the metal markets, are on the move and the trend holds risks just as significant for metals consumers as rising prices.

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The dynamics have been underway for much of this year and are gathering pace as a recent FT article summarized. The US economy is recovering strength, boosting the greenback’s attractiveness; meanwhile the US Federal Reserve is poised to end its program of quantitative easing in October, tightening dollar liquidity. Finally, the European Central Bank has begun a dovish phase of monetary policy, enhancing the dollar’s outlook relative to the euro. The US dollar has already risen relative to the euro, sterling and the yen, not to mention all the emerging market currencies.

By one gauge – JPMorgan’s EMCI index – emerging markets currencies have now fallen against the US dollar below their 2007 nadir, with the index falling to its lowest point against the US dollar in 11 years. The Russian Ruble, already down some 20% since the start of the year due to the Ukraine crisis and fears about the effects of possible sanctions, slid further, nearing the level that would trigger central bank intervention to defend the currency.

Meanwhile the Brazilian real sank to its lowest level against the dollar since 2008 this week and the Mexican peso and South Korean won were among the worst performing currencies over the past week. The Turkish lira and South African rand have fallen to their lowest levels against the greenback since late January and Indonesia’s central bank said on Monday it had intervened in foreign exchange markets to limit a sharp fall in the rupiah, which hit a seven-month low.

Falling currencies should be good for emerging markets, particularly if they are resource dependent exporters as it boosts revenue from exports that had been suffering from falling commodity prices. Yet some emerging markets are also heavily indebted borrowers in foreign currencies and, for them, a fall in the exchange rate equates to sharply higher debt repayments.

 

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