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.
• Investors who earlier put their money in emerging markets have recently preferred American assets.
• As, this has become more attractive now yielding higher returns. Click here to know more.
• 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