The U.S. dollar is on a major strong streak, but that’s worrisome news for other countries around the world.
The dollar’s continued rise has hit emerging market currencies hard, and, Monday, JP Morgan’s index of EM currencies reached an all-time low, the Financial Times reported.
It dropped to 79.36 for the first time since the index’s creation in 2000, the report said.
Having a weaker currency is not always bad news for emerging markets. While it means more expensive American imports, it also means more attractive exports for many developing countries.
Except the oil-exporting ones.
Countries like Russia, Nigeria, and Mexico are facing the double whammy of weakening currencies and dropping oil prices, the FT noted. Not to mention other resource- and commodity-exporting countries dealing with weaker export demand from a struggling China.
So while the dollar continues to climb, times are tough for the emerging world. But the countries that will most need to remain on their guard are those with high levels of debt held in U.S. dollars.
Granted, many governments in the developing world learned from 1980s Latin America and 1990s Southeast Asia, where a reliance on dollar-denominated debt pulled multiple economies into default.
They were again reminded of that risk last year, when the Federal Reserve signaled that the U.S. economy had improved enough that it would soon end its asset-buying program, and investors scrambled to pull out of emerging markets.
Governments grew prudent, and began to limit their exposure to foreign debt. But, as the Bank for International Settlements noted in its December quarterly review, private banks and companies within emerging markets have not followed suit.
Instead, many firms have taken on large dollar-denominated debts that could become extremely difficult to repay, the BIS said.
That could be just as dangerous, notes The Wall Street Journal’s Allen Mattich, because EM governments will need to bail these guys out when they falter, which will still scare investors away.
Capital flight is the last thing any of these countries needs.