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Fall in Emerging market currencies (Main reasons (Dollar is the anchor for…
Fall in Emerging market currencies
Main reasons
Dollar is the anchor for global trade and
global financial flows
-Thus when Dollar gains, emerging market currencies weaken
US fed raising interest rates and other western countries tightening Monetary policies
-Thus Investors, who earlier put money in emerging markets now pull back, as american assets yield higher yields
Emerging market economies affected by Hot money flows in the market
Emerging market economies are prone to higher inflation than compared to developed ones
-This is due to the higher Infrastructural demand in developing countries
In herent weakness in Globalised Era
In news:Argentina
Argentina's currency, the peso, lost approximately
50% of its value this year and 25% in August alone
It has asked for 500million dollar loan from IMF on the premise
that the money could be used for servicing debt and intervening in the currency markets.
Most of Argentina's debt is dollar dominated, and hence the growing weakness of Peso
Decrease in the farm exports, high energy prices
and stronger dollar has weakened the currency more
What went wrong in Argentina?
plagued by
economic problems for years, but commodities boom of the past
decades helped the country repay money it owed to IMF
raised public spending,
nationalized companies and heavily subsidised many items of daily life started to shake the economy
Controlled exchange rate created Practical problems, giving rise to black market for dollars and heavily distorting prices
General problems in Emerging economies
A weak banking sector
High fisca I deficit and CAD
Substantial short-term foreign currency debt
High dollar-denominated debt and not having adequate foreign reserves
Reliance on commodity exports
Corruption, Institutional weakness, Poor economic & Political leadership, Poor capacity augmentation
Reliance on Imports
More revenue spending with subsidies, more prominence to public sector