September 11, 2011
Emerging-Market Currencies Join Global Selloff
After rallying for much of this year, emerging-market currencies have joined the sell-off in financial markets. Fears have grown that the euro zone's debt crisis could reverberate through the global economy and hurt even the fastest-growing countries.
Lower interest rates would remove some of the appeal emerging-market currencies have had relative to low-yielding major currencies, such as the dollar. Above, the U.S. dollar, euro and Swiss franc bank notes are seen on top of the notes of the Hungarian forint in a bank in Budapest August 8, 2011.
On Friday, currencies such as the Brazilian real and Mexican peso, which had been rallying, neared their lowest levels in a year as global markets tumbled. Investors and analysts have turned more cautious, partly because they expect emerging-market central bankers to cut interest rates to fight the effects of a slowdown in the developed world. Lower rates would remove some of the appeal emerging-market currencies have had relative to low-yielding major currencies, such as the dollar.
Emerging-market currencies fell in tandem with other risky assets on Friday as concerns grew about a potential Greek default. Greece's government Friday denied that it had any plans to default over the weekend, but the rebuttal did little to calm nerves. Adding to investors' worries about the euro zone's crisis was the resignation of Jürgen Stark, Germany's top representative at the European Central Bank.
Continues
The banking systems in most emerging-market countries are believed to be more stable than in previous crises, and these banks don't have significant direct
exposure to risky European debt. But a sharp slowdown and credit freeze in the developed world would hit exports and the financial system in developing regions.
"Everybody fears that what looks like a possible Greece default in the short term could cause a Lehman-type event ... a rerun of 2008," said Nomura strategist Tony Volpon. "That is what people are trying to hedge for."
Emerging-market policy makers are already signaling concerns about the slowing global economy. The Bank of Mexico on Friday said its members voted unanimously last month to hold interest rates steady, although worsening growth prospects and lower inflation risks prompted the central bank to open the possibility of cutting rates in the future. The Mexican peso traded at 12.6910 pesos against the dollar late Friday, not far from its 52-week low of 13 pesos. Mexico is particularly vulnerable to a slowdown in the U.S. because of the countries' proximity and close business ties.
Brazil's central bank cut interest rates 0.5 percentage point to 12% at the end of August, citing the global slowdown. The rate cuts have weakened the real sharply, and it traded at 1.6557 against the dollar on Friday, not far from its 52-week low of 1.7396.
"Eventually, all these central banks will cut rates," said Brown Brothers Harriman strategist Win Thin. He believes most of these rate cuts will only come in 2012, but is cautious about emerging-market currencies in the meantime. Emerging-market currencies and equities will "do poorly," he predicts, if a Greek defaults triggers a global banking crisis at a time when the major economies are already slowing.
Many emerging markets are also big commodity producers, which makes them more susceptible to a global slowdown that would send commodity prices lower. On Friday, commodity-related currencies, such as Chile's peso, took a particularly sharp hit. Chile is a big copper producer; international copper prices slid Friday because of the weaker international growth outlook.
Emerging-Market Currencies Join Global Selloff
After rallying for much of this year, emerging-market currencies have joined the sell-off in financial markets. Fears have grown that the euro zone's debt crisis could reverberate through the global economy and hurt even the fastest-growing countries.
Lower interest rates would remove some of the appeal emerging-market currencies have had relative to low-yielding major currencies, such as the dollar. Above, the U.S. dollar, euro and Swiss franc bank notes are seen on top of the notes of the Hungarian forint in a bank in Budapest August 8, 2011.
On Friday, currencies such as the Brazilian real and Mexican peso, which had been rallying, neared their lowest levels in a year as global markets tumbled. Investors and analysts have turned more cautious, partly because they expect emerging-market central bankers to cut interest rates to fight the effects of a slowdown in the developed world. Lower rates would remove some of the appeal emerging-market currencies have had relative to low-yielding major currencies, such as the dollar.
Emerging-market currencies fell in tandem with other risky assets on Friday as concerns grew about a potential Greek default. Greece's government Friday denied that it had any plans to default over the weekend, but the rebuttal did little to calm nerves. Adding to investors' worries about the euro zone's crisis was the resignation of Jürgen Stark, Germany's top representative at the European Central Bank.
Continues
The banking systems in most emerging-market countries are believed to be more stable than in previous crises, and these banks don't have significant direct
exposure to risky European debt. But a sharp slowdown and credit freeze in the developed world would hit exports and the financial system in developing regions.
"Everybody fears that what looks like a possible Greece default in the short term could cause a Lehman-type event ... a rerun of 2008," said Nomura strategist Tony Volpon. "That is what people are trying to hedge for."
Emerging-market policy makers are already signaling concerns about the slowing global economy. The Bank of Mexico on Friday said its members voted unanimously last month to hold interest rates steady, although worsening growth prospects and lower inflation risks prompted the central bank to open the possibility of cutting rates in the future. The Mexican peso traded at 12.6910 pesos against the dollar late Friday, not far from its 52-week low of 13 pesos. Mexico is particularly vulnerable to a slowdown in the U.S. because of the countries' proximity and close business ties.
Brazil's central bank cut interest rates 0.5 percentage point to 12% at the end of August, citing the global slowdown. The rate cuts have weakened the real sharply, and it traded at 1.6557 against the dollar on Friday, not far from its 52-week low of 1.7396.
"Eventually, all these central banks will cut rates," said Brown Brothers Harriman strategist Win Thin. He believes most of these rate cuts will only come in 2012, but is cautious about emerging-market currencies in the meantime. Emerging-market currencies and equities will "do poorly," he predicts, if a Greek defaults triggers a global banking crisis at a time when the major economies are already slowing.
Many emerging markets are also big commodity producers, which makes them more susceptible to a global slowdown that would send commodity prices lower. On Friday, commodity-related currencies, such as Chile's peso, took a particularly sharp hit. Chile is a big copper producer; international copper prices slid Friday because of the weaker international growth outlook.
