Forex Blog: Currency Trading News & Analysis.

April 1st 2008

Fundamentals Harm Emerging Market Currencies

Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation.  The currencies of South Africa and Iceland, for example, have both experienced declines 20% since the start of this year.  Risk premiums had fallen to historic lows prior to the credit crunch, and neither country experienced great difficulty financing its respecive deficits.  However, investors are growing increasingly nervous and are shifting capital to countries with stable current account balances. The Financial Times reports:

Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital.  However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."

Read More: Currencies at mercy of deficits

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