The US dollar’s relentless climb higher is blowing a hole in the finances of developing nations.
Policy makers in these countries are, collectively, burning through the equivalent of more than $2 billion of foreign reserves every weekday in an attempt to prop up their currencies against the dollar. In total this year, they’ve drained reserves -- the emergency stash they hold to fend off severe economic crises -- by $379 billion.
In a sign, though, of just how powerful the forces are driving the dollar higher, and of how perilous the current moment is, these efforts have done little to stabilize foreign-exchange markets in the most vulnerable countries.
From Ghana to Pakistan to Chile, currencies have plunged to record lows, exacerbating spikes in inflation, deepening poverty and fanning unrest that was already simmering after two years of economic malaise brought on by the pandemic. Worldwide, 36 currencies have lost at least a 10th of their value this year. Ten of them, including the Sri Lankan rupee and Argentine peso, are down more than 20%.
It all bears a certain resemblance to the great emerging-market crises of the past half century: Latin America’s debt debacle of the 1980s and the wave of currency devaluations that swept over Asia a decade later. For now, most analysts see those kind of extreme crashes as unlikely but at the same time point out that the Federal Reserve, the principal driver of the dollar’s surge, has a lot more work to do to quell inflation. And the higher it ratchets up US interest rates to achieve that goal, the greater the risk that more developing nations sink into a full-blown currency crisis that could in turn fuel a debt crisis.
“Without a doubt, we could get a real crisis in emerging markets,” said Jessica Amir, a strategist at Saxo Capital Markets in Sydney. “They’re already at a breaking point. The strong dollar is the peak of all uncertainties especially for vulnerable emerging markets.”
Of course, emerging nations aren’t the only ones getting hammered by the strong dollar -- just ask the Europeans and Japanese. The euro plunged to parity with the greenback for the first time in 20 years last month, while the yen tumbled to its weakest since 1998. But while those slides mean real pain for companies and consumers shelling out more for goods from overseas, developing countries that depend on the dollar to finance their governments face an almost existential threat from the same dynamic.
Emerging economies run down their foreign-currency holdings rapidly
So, even though reserves exhausted this year represent less than 6% of holdings, according to data from the International Monetary Fund for 65 developing nations, investors are taking note. It’s the fastest drop since a 2015 currency meltdown led by China’s surprise devaluation. This time around, some of the biggest declines in reserves are in Ghana, Pakistan, Egypt, Turkey and Bulgaria -- also some of the same places seeing the worst currency sell-offs.
Soaring bond yields and a $215 billion wall of debt payments due by the end of 2023 are set to deepen the agony, and analysts only differ on the scale of expected declines, with some predicting manageable losses while others such as Renaissance Capital and HSBC Holdings Plc go so far as to pencil in crisis-like slides for the more vulnerable nations.
“In an environment of tightening global liquidity, falling growth expectations, elevated inflationary pressure and a strong US dollar, it is reasonable to assume that emerging-market countries with acute macro difficulties will face continued currency stress,” said Paul Greer, a money manager at Fidelity International. “We are cautious.”