Turbulence Roils Emerging Markets In The Shadow Of A Strengthened U.S. Dollar India's currency hit an all-time low, not long after currencies in Turkey and Argentina slid to their own record lows. But one major reason why is not to be found in emerging markets at all.
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Turbulence Roils Emerging Markets In The Shadow Of A Strengthened U.S. Dollar

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Turbulence Roils Emerging Markets In The Shadow Of A Strengthened U.S. Dollar

Turbulence Roils Emerging Markets In The Shadow Of A Strengthened U.S. Dollar

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Turbulence Roils Emerging Markets In The Shadow Of A Strengthened U.S. Dollar

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ARI SHAPIRO, HOST:

The value of India's currency hit an all-time low this past week. At one point, a single dollar could buy more than 72 rupees. And India's not alone. Currency troubles have also hit other so-called emerging markets, countries like Argentina, Indonesia and Turkey. As NPR's Colin Dwyer reports, these difficulties have grown from some similar routes.

COLIN DWYER, BYLINE: If you've checked the news lately, there's a decent chance you've heard a pretty scary word. Actually, it's possible you've heard it a lot. Listen to some clips from CNBC and Bloomberg News.

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UNIDENTIFIED PERSON #1: It feels like contagion. Is it a contagion?

UNIDENTIFIED PERSON #2: Well, it's starting to become a little bit more like contagion. Look.

UNIDENTIFIED PERSON #3: Are we in a state of contagion at the moment?

UNIDENTIFIED PERSON #4: I mean, we most certainly are in a state of contagion.

UNIDENTIFIED PERSON #5: Contagion.

UNIDENTIFIED PERSON #6: Contagion fears.

UNIDENTIFIED PERSON #7: Broad-based contagion.

DWYER: Now, to be clear, these experts are not talking about an epidemic, at least not the physical kind. They're talking about the economic health of emerging markets around the world. And the diagnosis does not look great. The value of the currencies in Turkey, India and Indonesia have all hit historic lows in recent weeks, and Argentina's peso has lost nearly half its value since the year started. In other words...

ESWAR PRASAD: Emerging market currencies are taking a beating across the board.

DWYER: That's Eswar Prasad, a global economist and professor at Cornell University. He says there's a variety of issues confronting these countries. Turkey's president, for instance, has tied up politics with monetary policy. And what's worse, the U.S. has doubled tariffs on Turkish steel and aluminum. In Argentina, meanwhile, investors are spooked by skyrocketing inflation. But one major source of their currency troubles comes not from these countries at all. It rests in the U.S.

PRASAD: The fact that interest rates have been rising in the U.S. causes investors around the world to rethink the proposition of taking risks by investing in emerging markets in order to get higher yield.

DWYER: The U.S. central bank has raised interest rates twice already this year. Those higher interest rates help boost the value of the U.S. dollar and make it more pricey for countries to pay back their loans. That's really bad news for countries like Argentina and Turkey which have borrowed a whole lot of American dollars.

JOSEPH GAGNON: So you get a double whammy, higher interest rates and a higher dollar, making it harder to pay back. And that's what scares investors.

DWYER: That's Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. He has worked in the Federal Reserve, the Treasury Department. And he knows the value of a central bank getting to set its own monetary policies.

GAGNON: But when Argentina borrows in dollars, they have no control over those interest rates. And they aren't set by the Argentine central bank for the Argentine economy. They're set by the U.S. central bank for the U.S. economy. So it may not be appropriate for Argentina.

DWYER: But even if a country did not do much of its borrowing in dollars, it can still get stained with the same brush. Ask India or South Africa. They have stumbled into some of the same economic troubles as their emerging market peers despite avoiding many of the missteps in borrowing. Eswar Prasad again.

PRASAD: The sense of concern about the rest of the world is beginning to spread.

DWYER: Spread - in other words, like a contagion. But unlike some contagions, Gagnon does not expect this to spread too far to other countries.

GAGNON: So many emerging markets are in better shape than they were 20 years ago. It's got to make a difference. I have to believe it. But, you know, maybe I'll be wrong. But I don't think so.

DWYER: As far as the prognosis goes, it could be worse. Colin Dwyer, NPR News, New York.

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