The selloff in emerging market currencies over recent months looks set to worsen, according to analysts, who point out India’s rupee, Indonesia’s rupiah, and to some extent, South Korea’s won could face the brunt of the pressure.
Investors have been selling so-called ‘risk assets’ in recent weeks on fears that Greece may have to leave the 17-nation euro bloc after talks to form a new government broke down. After several days of selling, risk assets stabilized on Thursday. The Indian rupee - one of the worst affected currencies this year - strengthened against the U.S. dollar.
But David Roche, Global Strategist at Independent Strategy, a London-based research firm, sees emerging market currencies weakening further as these economies post disappointing growth, putting pressure on their central banks not to raise rates in the face of higher inflation.
Higher inflation and lower real interest rates could make these countries less attractive to foreign investors. Since many emerging markets depend on inflows of capital to fund their current account deficits, Roche foresees a “funding gap” developing.
On Wednesday, for example, the Indian rupee dropped to a fresh all-time low of 54.44 against the U.S. dollar. The country runs a current account deficit of 4 percent of GDP, making it especially vulnerable.Page 1 of 3 | Next Page