The strengthening of the dollar, the increase in the price of raw materials and the low demand in the money market make some currencies, particularly those of less developed or emerging economies, suffer even more from the volatility that has been generated by the geopolitical conflict in Ukraine , the energy crisis in Europe, the global economic slowdown and high inflation.
the weakest currencies
In the first eight months of 2022, the main currencies that have depreciated against the dollar are the Sri Lankan rupee, with 43.89%; the Ghanaian cedi, with 37.78%; the Lao kip, with 26.81%; the Turkish lira at 26.78%; the Ukrainian hryvnia, with 25.69%; the Argentine peso, with 25.22%; Sudanese New Dinar at 22.74%; the Hungarian forint, with 21.34%; the Malawian kwacha, with 20.67% and the Sierra Leonean leone, with 20.65%.
“Given the possibility that interest rates continue to rise in developed countries, it becomes more attractive to send savings to those countries because they will be paying more and, initially, being developed countries, it will involve less risk. This in the face of fears of a recession. If this happens, the same trend as in recent weeks will continue and the currencies of emerging countries will depreciate significantly against the dollar,” said Janneth Quiroz, deputy director of economic analysis at Monex.
Other depreciated currencies are the Pakistani rupee, with 20.21%; the Egyptian pound, with 18.68%; the Haitian gurda, with 18.11%; Japanese yen; with 15.69%; the Polish zloty, with 15.05%; the Swedish crown, with 14.49%; the Surinamese dollar, with 13.9%; the pound sterling, with 12.56%; the Danish krone, with 12.29% and the euro, with 12.27%
The depreciation of the euro and other developed currencies is due to pressures on its interest rate differential with the United States. In addition, there is uncertainty about the behavior of its economy due to geopolitical and energy problems.
The fall of the euro against the US dollar increases import costs (as it is an important partner for the region), which aggravates the increase in energy prices and the rise in inflation. “For years, European companies yearned for a weaker euro, and now that it is present, times do not favor this idea due to the entire situation that surrounds the area with the war between Russia and Ukraine, the energy crisis, winter around the corner. corner and inflation at historical highs”, assured Eduardo Ramos, financial markets analyst at ATFX Latin America.
Why do currencies depreciate?
A conceptual precision to consider is that devaluation and depreciation are different things. The devaluation of a currency occurs when the exchange rate regime is fixed, as was the case in Mexico in the middle of the last century. On the other hand, when there is a flexible exchange rate, the concept used is a depreciation.
After COVID-19, the monetary authorities lowered their interest rates in order to stimulate economic activity and help the recovery to be faster, after the effects of the closures in some sectors.
These types of policies tend to increase inflation, as people consume more. Now with inflation at multi-decade highs, what central banks are doing is trying to withdraw that money with restrictive policies (by raising rates). What makes the instruments of developed countries more attractive, increasing the demand for their currencies and decreasing those of the emerging ones.
Another important factor in the fluctuations of most currencies in the world is also explained by a rearrangement of investment portfolios, which generates volatility.
According to specialists, currencies depreciate or appreciate to a greater extent due to the great laws of the economy: supply and demand. Just like any product on the market. We will take as an example the dollar (reference in international trade), which, in case of uncertainty, investors resort to it as a refuge against other riskier assets (such as emerging currencies). As its demand increases, the currency appreciates.
Depreciation often represents a disadvantage for countries in the current situation, since it increases import costs (products purchased abroad become more expensive), which aggravates the increase in the prices of raw materials and inflation. . For example, the depreciation of the euro in recent weeks has represented a major cost challenge for companies in that region, since they must pay more (if products are paid in dollars), which translates into higher prices in products and more inflation for the final consumer.
A useful tool to regulate the demand and supply of foreign currency in the market has been the interest rates issued by central banks. In case of raising the interest rate, the cost of contracting consumer loans, housing, services or any other good, will increase significantly, so the consumer will restrict his attempt to buy goods and services, and their prices will tend to fall. . On the contrary, the objective of lowering the reference rate will be to encourage consumption.
“Those who are users of foreign exchange operations would be affected by variations in the price of currencies. It is closely linked to the issue of inflation, since many of the products we consume are imported, especially from the United States, therefore if the Mexican peso lost value, it would have implications for higher inflation,” said James Salazar, deputy director of analysis CI Banco’s economic and stock market.
