exchanging currency Then Chih Wey/ZumaPress

The Emerging-Market Currency Rout

With the currencies of Malaysia, Indonesia, Turkey, Brazil, Colombia, and Chile hitting record lows last week, currency traders around the world are asking how much lower emerging-market currencies can go. The answer is: Quite a lot.

SANTIAGO – With the currencies of Malaysia, Indonesia, South Africa, Turkey, Brazil, Colombia, Chile, and Mexico hitting record lows recently, currency traders around the world are asking: How much further can emerging-market currencies weaken?

The standard approach to answering this question takes a relatively normal base year and measures how much a country’s currency has depreciated since then. That number is then adjusted for the inflation differential between the country and its trading partners. If the resulting real exchange rate is not too far from that of the base year, the market is said to be in equilibrium, and little or no further depreciation should be expected.

Now consider an alternative method. Take the same country’s current-account deficit and ask how large a real depreciation is needed (making some assumptions about trade elasticities along the way) to close that external gap. If the recent real depreciation achieves that threshold, no further change in the exchange rate should be expected.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/LMFszbg;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.