Hot money exodus ends currency wars

Turkey’s efforts to pull the lira off record lows on Monday are likely to be emulated across emerging markets as central banks fight to avert an exodus of foreign capital driven by the impending turn in US policy.

It’s all a far cry from a year or so ago, when emerging market exporters were battling rising exchange rates and Brazil was accusing Western policymakers of waging currency wars by flooding the world with cheap money.

No option

When Brazil’s finance minister Guido Mantega complained about currency war, “he didn’t think that in a few months, the war he would be fighting would be to strengthen the real,” UBS strategist Manik Narain said.

“Emerging markets have imported US monetary policy for five years but they haven’t imported the recovery. Now the Fed is effectively tightening so they too are forced to tighten.”

With economies already weakening, policymakers will be reluctant to tighten policy. Instead countries including India, Russia, Indonesia, Peru and Poland have been selling dollars.

But some, such as India, Turkey and South Africa, have little hard currency to sell given import needs and outstanding external debt, whether corporate or sovereign.

Those that have an inflation problem or large oil import bills in dollars – such as India or Turkey – simply cannot risk letting currency weakness go too far.

Full article: Hot money exodus ends currency wars (The Sidney Morning Herald)

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