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Briefing

Emerging Markets: Currencies

Appears in: Emerging Markets, Markets, Currencies

Critical Issues

Background:

Emerging market (EM) currencies have rallied strongly since March 2009 against the U.S. dollar recovering a large part of the loses incurred at the center of the global crisis (July 2008 to March 2009). Elevated global liquidity, a weak dollar, improvements in risk appetite, rebounding commodity prices and relatively stable emerging markets fundamentals in comparison to past episodes of crisis are behind the recovery. Furthermore, higher growth and wider interest rate differentials compared to advanced economies have played in favor of EM currencies. Finally, IMF credit line facilities and the Fed currency swap options to strategically important EM countries (Brazil, South Korea, Mexico, and Singapore) helped in mitigating balance of payment risks.

However, uncertainties about the shape of the global recovery, profit taking, and revival of global risk aversion remain the main concerns. Moreover, miscalculations on the implementation of exit strategies around the globe as well as intervention and the imposition of capital controls pose a significant risk.

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