Currency Crises Erupt Amid Rate, Trade Tensions

Headwinds hit currencies in emerging markets.

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Rising US interest rates and growing trade tensions are contributing to a rash of currency crises in major emerging markets.

The Hong Kong Monetary Authority intervened repeatedly in the market in April to defend its currency—including 13 times during a single week—using its reserves to sell US$6.54 billion and buy more than HK$51 billion, as the Hong Kong currency fell to its lowest level since 2005 in the face of rising US interest rates. Pakistan devalued the rupee by 5% in December 2017 and another 5% in late March to boost the country’s worsening finances ahead of upcoming elections in July.

US President Donald Trump tweeted on April 16: “Russia and China are playing the Currency Devaluation game and the US keeps raising interest rates. Not acceptable!”

The 8% decline in the ruble in early April was due mainly to new US sanctions on influential Russians. Currency experts say additional sanctions could trigger another major sell-off in the ruble.

Meanwhile, Iran’s rial fell to record lows, losing a third of its value so far this year, reaching 60,000 to the dollar last month. Tehran announced it was setting the official rate at 42,000 rials to the dollar and said it would punish severely anyone attempting to exchange rials at a different rate. A potential collapse of the Iran nuclear deal threatened to worsen the country’s dollar shortage. Iran’s economic crisis caused major demonstrations across the country in January, in which 21 people lost their lives.

Turkey’s lira dropped to record lows in April on fears of overheating in the economy, with double-digit inflation and a widening current account deficit. Balance of payment strains also hit the Argentine peso and the Tunisian dollar.

Meanwhile, economists say GDP growth in emerging markets as a whole appears to have peaked, and a buildup in debt could be troublesome.

Most African sovereigns are only a small economic shock away from debt problems, which are concentrated in Nigeria, Angola, Mozambique, Ghana and Zambia, according to London-based Capital Economics.

“Near-term prospects for the global economy continue to be bright, but while the sun is shining, we are seeing more clouds accumulating on the horizon,” Christine Lagarde, managing director of the International Monetary Fund, said at the organization’s recent spring meeting.


Lagarde cited the all-time high in global debt (two-thirds of which is in the private sector), a lack of international cooperation, rising financial-market volatility and growing protectionism as causing an erosion of confidence. “International cooperation, which is helping to reduce poverty, is now being questioned, especially with trade,” she said.

The markets that are most vulnerable to the US’s recently announced trade measures, including tariffs on China, are manufacturing-based economies in East Asia, particularly Taiwan, Malaysia, Singapore and South Korea, as well as Chile.

The export components of emerging market business surveys have softened, adding to evidence that aggregate EM growth has peaked in this cycle, Capital Economics says. “While in most cases the slowdown should be relatively gradual, Hong Kong and Pakistan look set to slow more sharply,” the firm says.

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