Emerging Markets’ Submerging Currencies

For many emerging markets, 2014 has gotten off to a grim start, with concern over the Chinese economy’s marked slowdown and the Argentine peso’s steep slide against the US dollar triggering heavy selling pressure on an array of currencies. But differentiation is needed, and that is what financial markets are now doing.

MUNICH – For many emerging economies, 2014 has gotten off to a grim start. Concern over the Chinese economy’s marked slowdown and the Argentine peso’s steep slide against the US dollar has triggered heavy selling pressure on an array of emerging-market currencies. But the current volatility does not portend sustained weaker growth in emerging economies as a whole. Differentiation is needed, and that is what financial markets are now doing.

The scale of the battering varies widely from country to country. For example, the problems currently dogging Argentina are anything but a surprise. On the contrary, they are the near-inevitable result of years of policy mismanagement that has spawned high inflation, a badly overvalued currency, and massive erosion of foreign reserves.

By contrast, the currencies of Central and Eastern Europe’s emerging markets have remained relatively stable. For example, thanks to Poland’s robust economic performance, the złoty has essentially maintained its exchange rate against the euro, slipping 2.2% since the start of the year (as of the beginning of February). The Hungarian forint lost slightly more than 5% against the single currency over the same period, but this is less sharp than in the past, when the country’s macroeconomic problems made the exchange rate far more sensitive to shifts in market sentiment.

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