Forex Investment and Currency Trading

Over the summer, it was clear that growth in many emerging market economies was starting to moderate in response to tighter monetary policy in some countries and lower demand growth in the United States and the United Kingdom.

The financial volatility and general withdrawal from risk that has occurred over the past month has exposed emerging economies to heightened exchange rate volatility. The general pattern of exchange rate changes is consistent with a significant reduction in risk appetite. The U.S. dollar, the yen, and the Swiss franc have all appreciated since the end of July. These are all funding currencies with low nominal interest rates. In contrast, many of the emerging market currencies, and some high nominal interest rate industrial country currencies, have depreciated over the same period. For example, the Mexican peso, the Korean won, and the Brazilian real all depreciated between 20% and 25% since mid-September.

Over the same period, the Australian dollar depreciated by 19%. This suggests that a general withdrawal from risk has helped to drive emerging market exchange rates, in addition to any specific concerns about individual countries. Heightened exchange rate volatility has generated unexpected foreign exchange losses for a range of institutions across emerging markets. These balance sheet losses may, in some cases, be large enough to have macroeconomic effects.