Many factors affect the relative value of foreign currencies relative to other currencies. Central bankers in developed countries have generally kept interest rates very low for an extended period of time, which has materially impacted foreign exchange rates. Economic activity in one country and the related levels of imports and exports alters currency exchange rates with other importing and exporting sovereign trading partners.
In the U.S., the Federal Reserve is just beginning to slow its expansionary monetary policy by decreasing its monthly purchases of U.S. Treasury securities and residential backed mortgage bonds. Generally, expectations are that the Fed won’t actually begin to raise short-term interest rates for at least a year or more.
Historically low developed-markets interest rates have helped many emerging country economies but have also masked underlying structural issues. With widespread talk of rising interest rates in the U.S. and some other developed countries, the relative value of many emerging currencies is generally expected to fall.
This decrease in relative currency strength is already happening in some emerging countries. Some emerging markets' central bankers and policymakers are trying to stem these tides. At the same time, the flow of goods and services and the currencies used to pay for these items can adjust due to market forces. These exchange rate adjustments and the related flow of funds variances can be dramatic and economically difficult to absorb.
Local governments and politicians in some emerging markets are blaming businesses, media, speculators and all the other traditional scapegoats for the currency exchange rate challenges. While many entities can influence the value of currencies, also very influential are the level of domestic interest rates combined with the amount of sovereign debt, the perceived stability of the issuing government and rationality of the policymakers.
In Turkey, the central bank recently raised its benchmark one-week borrowing rate to 10 percent from 4.5 percent in one move. This resulted in a temporary strengthening of the Turkish Lira against the U.S. dollar, but this relative rebound may not be long-lasting, as the underlying economic fundamentals will slowly adjust the relative values of the currencies.
Argentine political leaders are blaming speculators and business for the weakness of the Argentine peso. Government exchange policies limit the official rate of exchange between the peso and dollar. A 15 percent permitted decline in the relative value of the peso in the past week only served to unnerve currency-market participants. Indications of a market-driven exchange rate without the imposed conversion limit reveal a much weaker peso value relative to the dollar.
Over time, the global market forces will overwhelm the short-term efforts of emerging markets' policymakers and jawboning of politicians. Structural changes will be forced upon some emerging market countries as exchange rates devalue local currencies. Opportunities for speculators are enhanced when emerging countries try to artificially influence the effects of global economic trends and external interest-rate movements.
Kirby Brown is the CEO of Beneficial Financial Group based in Salt Lake City.