Oil prices are falling the most in six years, undermining exchange rates of energy producers from Latin America to Russia, just as slowing growth in China and a tumbling yen weigh on currencies across Asia. And surging demand for the dollar, the result of speculation that U.S. interest rates will rise, is adding to the woes of developing-nation currencies.
An index tracking 20 key exchange rates has fallen to levels last seen more than a decade ago, down 10.2% this year in what would be the biggest annual slide since 2008. Argentina’s peso and Czech Republic’s koruna will lead declines among 16 of 23 developing-nation currencies next year, according to strategist forecasts compiled by Bloomberg.
“Emerging markets are suffering slow growth, low commodity prices and weak exports,” Pierre-Yves Bareau, the London-based head of developing-nation debt at JPMorgan Asset Management Inc., which oversees $1.6 trillion, said by phone on Dec. 4. “We don’t expect that to change.”
While some developing nations may welcome a weaker currency because it makes their exports more competitive, for others the pace of decline is destabilizing their economies by fueling inflation and eroding investor confidence.
In his annual address to parliament on Dec. 4, Russian President Vladimir Putin pledged “harsh” measures to punish speculators who contributed to the ruble’s 38% drop versus the dollar this year, its worst performance since the nation defaulted in 1998. The ruble (CME:R6F15) has “substantially” deviated from its fundamental value, creating risks for financial stability, the central bank said on Dec. 4.
Russia has burned through $90 billion of its foreign reserves this year in a failed attempt to stem the slide, which saw the currency plunge to a record versus the dollar on Dec. 3.
The advantage to exports from the weaker exchange rate has been offset by falling oil revenues and the impact of sanctions imposed for the nation’s incursion into Ukraine. Russia’s exports dropped 13% in September from a year earlier, the worst decline since 2009, while crude oil has lost a third of its value in 2014, the most since it slid 54% in 2008.
The gauge has been tumbling since the middle of the year, while a rebound in the second quarter proved short-lived as growth in developing nations failed to gain traction.
The outlook, though, isn’t universally negative. Investors can profit by purchasing currencies of nations with relatively high interest rates, such as the Indian rupee (CME:H3F15) and South African rand, in deals funded in euros or yen rather than dollars, Christian Keller, the London-based head of economic research at Barclays Capital, said at a conference in New York on Dec. 4.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.