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Emerging Currencies

Shekel is One of the Big Boys

The Continuous Linked Settlement (CLS) Bank, which performs the thankless job of settling the nearly $4 Trillion in currency trades completed each day, recently announced that it will now settle trades involving the Israeli Shekel. This is quite an honor for Israel, as only 16 other currencies can claim this distinction. Implicitly, the Israeli Shekel has been deemed both important and stable enough to be fully convertible. The announcement marks another positive development for the currency, which has appreciated by an astounding 30% against the Dollar over the last year, including 15% since the beginning of 2008. It is unclear when amateur traders will be able to trade the Shekel, but now that it is included in the CLS roster, it probably won't be long. YNet reports:

Korea May Regulate Borrowing

Over the last two years, South Korea's overseas borrowings more than
doubled, to $388 Billion. Nervous, perhaps, that Korean businesses may
be overextending themselves, the government is seeking to regulate such activities. Based on the way the forex markets
responded to the news, it must be perceived that borrowing abroad is
helping the Korean economy. On the one hand, if loans are denominated
in foreign currency and must then be converted to local currency, this
would exert upward pressure on the Korean Won. On the other hand, this
also requires more local currency to be printed, which fuels inflation. Much
of the borrowings are being undertaken by shipbuilders who are trying
to hedge their exposure to a rising Dollar. The Edge Daily reports:

Hungarian Forint Nears 3-Year High

Raise your hand if you've ever heard of the Hungarian Forint.  I didn't think so.

Central Banks Defend Krona

In the early months of 2008, the Icelandic Krona continued its downward slide, ultimately losing 26% of its value. Inflation is nearing 12%, the economy is in tatters, and there is a crisis of confidence affecting the banking sector. Having already raised interest rates to 15.5%, the Bank of Iceland was out of options. Perhaps out of concern that the turmoil in Iceland would spread to continental Europe, the Central Banks of Norway, Sweden, and Denmark were impelled to act. Their assistance took the form of a swap agreement, which provides Iceland with access to €1.5 Billion in emergency funding.

Korean Won is Worst in Asia

In the year-to-date, the Korean Won has recorded the worst performance of any currency in Asia, having recently fallen to a 6-week low. The story is being driven as much by Dollar strength is by Won weakness. US equities have rallied over the last month, as investors may have been overly pessimistic in the previous months regarding near-term US economic prospects.  In addition, the Fed has probably lowered interest rates for the last time, whereas the Central Bank of Korea has held its benchmark lending rate at 5% since the summer. This yield differential, which currently favors Korea, may narrow substantially over the coming months, as the Bank of Korea is forced to reckon with slowing growth and rising inflation. Bloomberg News reports:

Turkish Lira Set for Decline

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion, as well as skyrocketing inflation, are hurting many such currencies. In Turkey, inflation is so problematic (9.4% at last count) that the Central Bank has raised its benchmark interest rate to 15.25%. Ironically, the more the Lira depreciates, the harder it becomes for the Central Bank to control inflation, causing the Lira to slide further as part of a self-perpetuating free-fall.

Vietnam Dong to Slide Further

In the year-to-date, the Vietnamese Dong has fallen by .7%.  That may not seem like much, but since the Dong/Dollar exchange rate is approximately 16,000 to 1, every .1% is meaningful. Unfortunately for Vietnam, analysts are predicting that the Dong will fall further, due to a confluence of factors. First, the Vietnamese stock market is tanking; the 42% decline recorded thus far in 2008 makes it Asia's worst performer and unattractive for foreign investors. The second factor is inflation, which is nearing 20% and is directly eroding the value of the Dong.

Fundamentals Harm Emerging Market Currencies

Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest.

Brazil to Alter Forex Rules

In a thinly disguised effort to stem the appreciation of its currency, Brazil has announced sweeping changes to its rules governing forex.  Rather than revert to outright intervention in the forex markets, however, Brazil will permit businesses to hold more foreign currency as part of their reserves.  In this way, the Central Bank won't have to purchase Dollar-denominated assets directly.  Instead, it is hoping that the natural attraction of US and other Western capital markets will be enough to drive private Brazilian companies to increase their holdings abroad.  It is

Ruble as Regional Reserve Currency

Two weeks ago, then-First Deputy Prime Minister of Russia, Dmitry Medvedev, commented publicly on a more significant role for the Russian Ruble in the global economy, and especially in the regional economy.  Fast forward to yesterday, when Medvedev was elected the next Prime Minister of Russia, which means his ideas on forex are more likely to become policy.  Medvedev has argued in favor of turning the Ruble into a regional reserve currency.  This would first necessitate liberalizing its forex policy by permitting the Ruble to float freely; it is currently fixed to a basket o

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