Lingering fears over the impact of a tapering of asset purchases by the US Fed have seen emerging market currencies continue to weaken over the past month – countries with current account deficits have been among the hardest hit. Falling commodity prices have also led to sharp drops in the currencies of major commodity producers. Some central banks have already taken action in an attempt to limit currency weakness – Indonesia, Turkey and India have all tightened monetary policy over the past couple of months. Brazil has also raised interest rates, although this has been related more to fears over rising inflation than the decline in the real. Nonetheless, we think these economies are exceptions and we doubt that the sell-off of EM currencies will trigger a wave of rate hikes elsewhere in the emerging world.
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