Weakening Emerging Market Currencies

What is the issue?

Many of the emerging market economies' currencies including that of India are weakening against the U.S. dollar.

What are the recent developments?

The Indian rupee weakened past the 71 mark for the first time recently.
It has registered a loss of about 10% of its value against the dollar since the year's beginning.
This makes the rupee the worst-performing currency in Asia.
Other emerging market currencies too have suffered much larger losses.
They, notably, include the Turkish lira, the Argentine peso and the South African rand.
The Argentine peso has lost more than half of its value in 2018.
It witnessed a sharp loss of more than 10% on a single day.
This happened despite a 15 percentage point increase in interest rates by Argentina’s central bank.
It was an effort to stem the outflow of capital and shore up the value of the currency.

What are the causes?

External - A common factor is the increasing demand for the dollar across the globe.
The U.S. Federal Reserve raised the interest rates earlier this year (2018).
The resultant tightening of liquidity in the West has played a major role in strengthening of the dollar.
Emerging market countries earlier benefited from the West's easing of monetary conditions.
These are now facing the impact of a return to the West's tight monetary policy.
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Domestic - Emerging market economies cannot simply blame external economic factors.
The management of these economies has generally been far from ideal.
This is particularly true when it comes to hard-hit economies like Turkey and Argentina.
A key trouble of emerging market economies is the higher domestic inflation in relation to the economies in the West.
So it is natural that their currencies slide in value over time against the dollar and other major Western currencies.

What is the way forward?

Shift of capital across the globe due to interest rates variations is normal.
There is need for a drastic change in emerging markets' monetary policy as against that of the West.
The role of emerging markets' central banks in the current scenario is crucial.
Their mandate should be to let their currencies find their true value in a smooth manner.

Source: The Hindu