`Every Man for Himself’ as Emerging Markets Curb Currencies
Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market.
Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency.
The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies.
“The G-20 made a vague pledge not to manipulate currencies much, but there was no mechanism to ensure that each country will not keep taking unilateral measures,” said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. “It’s every man for himself.”
China’s yuan declined by the most in 22 months after the central bank set the weakest reference rate for the currency since September. Bank Indonesia will “guard” the rupiah at its “fundamental” level of 8,900 to 9,300 against the dollar and buy foreign currencies to limit volatility, Governor Darmin Nasution said today. Bank Negara Malaysia Governor Zeti Akhtar Aziz told Bloomberg Television yesterday she favors a gradual strengthening of the ringgit.
“Although what came out of the G-20 meeting was better than expected, it didn’t really have any teeth in it,” said Kieran Curtis, a fund manager who helps oversee about $2 billion in emerging market debt at Aviva Investors in London. “There was still no framework laid out to deal with countries following an ultra-competitive exchange-rate policy.”
The concern of emerging market officials is that failure to counter gains in their currencies will mean exports are choked, removing a source of economic strength. Their exchange rates have risen as investors bet the Federal Reserve will next week introduce more so-called quantitative easing, a policy move which has hurt the dollar.
More currency measures may be on the way. President Juan Manuel Santos has said Colombia may take additional steps this week to ease the peso’s rally and Chilean President Sebastian Pinera said Oct. 25 that his government plans to increase foreign investment limits for institutions.
‘Keeping an Eye’
Having already removed a 15 percent tax exemption for foreigners on income from domestic bonds, Thailand Finance Minister Korn Chatikavanij warned on Oct. 25 that regulators are “keeping an eye” on speculative inflows.
While he didn’t advocate action by European governments, Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, also said today the dollar is “undervalued” against the euro.
“Europe is the victim” of global currency policies, Juncker said at a conference in Frankfurt.
The tensions over currencies may make it harder for G-20 leaders to prove their words carry weight when they convene in Seoul on Nov. 11-12, said Beat Siegenthaler, a currency strategist in Zurich at UBS AG, the world’s second biggest foreign-exchange trader.
“The agreements reached so far don’t mean much in practice,” he said. “From the point of view of these countries, as long as the big countries are undertaking QE measures and looking out for themselves they don’t feel any obligation not to act too.”
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