Developing economies are beginning to worry about the continued appreciation of the dollar in financial markets. Many announce measures, but remain vulnerable.
Almost all G20 countries are seeing their national currency depreciating against the dollar. The “champion” of the slide is the Turkish lira, which since the beginning of 2024 has lost 8.8% of its value against the American currency. But the Japanese yen has also depreciated by 8%, while the won, the currency of South Korea, records losses of 5.5%.
The weakening of the currency does not only concern developing economies. The Canadian dollar, for example, has depreciated by 4.4%, the Australian dollar by 3.3%, while losses for the euro are limited to 2.8%.
Appreciation due to “reluctant” FED?
But why is the US dollar constantly strengthening? US data suggests that inflation is lurking and may return soon.
Thus, traders are betting less and less on a rate cut, which is helping to boost the US currency’s gains. In 2024 alone the Bloomberg Dollar Spot Index, which tracks the dollar against a dozen major currencies, has risen by at least 4%. In addition, rising tension in the Middle East favors the strong dollar, which is seen as an attractive “safe haven”. On top of that, most economies show weak growth indicators, while at the same time in the US the economic data exceeds all expectations, even in terms of employment or retail turnover.
Risks to developing economies
Developing economies in particular are considered highly exposed to the risks of exchange rate fluctuations, as their debt is “translated” into dollars. According to a study by the International Monetary Fund (IMF), a 10% rise in the dollar in foreign exchange markets causes a fall in the Gross National Product (GDP) for developing economies by 1.9% within a year, while the remaining adverse effects last more than two years.
It is indicative that in 2022, in a corresponding period of appreciation of the dollar, Sri Lanka was faced with the worst financial crisis in its history and eventually went bankrupt. Other developing economies rushed to raise interest rates in an attempt to prevent further slide of the hryvnia.
Corresponding interventions are also taking place in the current situation. In Turkey, interest rates have increased within a few months from 5% to 50%. In Brazil, the country’s Central Bank intervened in the currency market on April 1, for the first time since President Lula returned to power. In Indonesia the central bank is stepping in to support the national currency, the rupiah, which has fallen to four-year lows against the dollar.
On the other hand, developing economies fear that interest rate hikes will “boomerang” on economic growth, as happened in Turkey. Kota Kirayama, an analyst at SMBC Nikko Securities, estimates that “exchange rates and increases in oil prices are intensifying inflationary pressures for developing countries. However, many of them prefer not to resort to monetary policy tools, but to intervene in the exchange rate in order to ‘buy time’ for their next moves”. For example in China some state-owned banks sell dollars, while in Malaysia the central bank forces companies that do business with the state to “repatriate” profits that had been converted into dollars.
Source: DW
