Declining Currencies

By Isaac Cohen*

The assertion that change is approaching in the monetary policy of the United States, in the sense that the days of easy money may soon be over, has caused a reversal of capital flows  out of emerging market economies. From Indonesia, India and Turkey, to Brazil, currencies are tumbling and capital is flying out, expecting better yields back in their home countries.

Decreases in commodity exports, due to slower demand in China and India, were contributing to slower growth rates among emerging market economies. Still, capital inflows persisted, pushing currencies upward and generating complaints from exporters and central bankers. Therefore, depending on how far they will go, the devaluations may be a welcome correction. Besides, this is not a free fall. Central banks are managing .the decline, according to Brazil’s Finance Minister Guido Mantega “to make sure there is not excessive volatility.”

Also, this time may be different. There are less dollar denominated debts, balanced budgets, subdued inflation, abundant foreign exchange reserves and flexible exchange rates.

Nobel Prize winner Paul Krugman, in his New York Times column, said he did not think this change in the performance of emerging market economies posed a threat to the world economy. However, Professor Krugman also admitted he was saying that “with his fingers crossed behind his back”.

*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC Washington Office.

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