Emerging market economies continue to be in the spotlight for the wrong reasons as their currencies resume their prolonged slide against the U.S. dollar. The Indian rupee weakened past the 71 mark for the first time ever on Friday, registering a loss of about 10% of its value against the dollar since the beginning of the year. This makes the rupee the worst-performing currency in Asia. Other emerging market currencies, most notably the Turkish lira, the Argentine peso and the South African rand, have suffered much larger losses owing to a serious loss of confidence among investors. The Argentine peso, which has lost more than half of its value in 2018, for instance, witnessed a sharp loss of more than 10% on Thursday alone. This happened despite a 15 percentage point increase in interest rates by Argentina’s central bank in order to stem the outflow of capital and shore up the value of the currency. The Turkish lira, which has lost almost half its value this year, is another currency in the doldrums. The crises in both Turkey and Argentina have been intensified by domestic economic issues. But the common factor underlying the wider carnage among emerging market currencies is the increasing demand for the dollar across the globe. The tightening of liquidity in the West, with the U.S. Federal Reserve raising interest rates, has played a major role in the strengthening of the dollar since February this year. Investors who earlier put their money in emerging markets have recently preferred American assets, which now yield higher returns.
Such a widespread shift of capital across the globe owing to the variations in interest rates is normal whenever the global interest rate cycle turns. Emerging market countries, which earlier benefited from the easing of monetary conditions in the West, are now feeling the pain of a return to monetary policy normalcy. This does not, however, mean that emerging market economies can simply blame external economic factors for the present turmoil in their currencies and hope for better times. The management of these economies has generally been far from ideal, particularly when it comes to hard-hit economies like Turkey and Argentina. The chief among the troubles of emerging market economies is higher domestic inflation when compared to the economies in the West. It is only natural, then, that their currencies will slide in value over time against the dollar and other major Western currencies. Unless there is a drastic change in emerging market monetary policy vis-à-vis the West, this is likely to be the case for a long time. The mandate of emerging market central banks in the current scenario should be to let their currencies find their true value in a smooth manner.
