Currencies Have Run Amok

It's quite surreal, in a horrible kind of way, to look at the markets over the last couple of weeks. Despite some gains, and what appeared to be stabilization early last week, stocks tumbled on Friday. The Emerginvest heat map does not paint a pretty picture: South Korea was down 11% and India was down 11% in just the day to say the least. The rest of the world dropped at least a few percentage points (except Luxembourg apparently which was up a shade over 1%). Currencies have run amok.

According to a Guardian.co.uk article entitled: "Global Markets- Stocks dive to 5-yr lows; dlr and yen soar,"

The dollar and yen — considered among the safer currencies — surged to multi-year highs against European currencies such as the euro and sterling as investors repatriated investments in search of shelter and speculation of global interest rate cuts weakened those currencies with the highest rates now….The disorderly nature of the moves, which catapulted one-month dollar/yen implied volatility up to 20 percentage points higher at one point on Friday to as high as 45 percent, fuelled speculation about Group of Seven central bank intervention to stabilise markets.

This type of roller-coaster trading is now fueling global concerns about currency stability. So much so that the Federal Reserve is considering selling dollars to buy other currencies – a tactic which has been used exceedingly rarely by the United States government.

According to a New York Times article entitled: "Some Currencies Plunge as Stocks Sink Worldwide,"

"The risk is huge, but it is appropriate at this point, because if the emerging markets go into default, the consequences would be catastrophic," said Kenneth S. Rogoff, an economist at Harvard.

When a developing country's currency loses value rapidly, it impedes the ability to pay back loans from Western banks. That could cause a rash of corporate or even government defaults — a feature of previous financial crises in Asia and Latin America.

This presents a double-punch to already hurting economies which are attempting to unfreeze still suffering domestic credit markets. I think Kenneth Rogoff chose the perfect word: "catastrophic." I can't imagine what would happen to the already struggling world economy if a government defaulted on loans due to the crisis.

I wish I knew a better answer to the question "what will tomorrow bring in the economic world?" but I think the true answer is that no one knows with any degree of certainty. I believe that the economic powers that be will feel even more pressure to help contain the crisis. I think we will see the G-7 and the United States meeting relatively soon, as well as hearing more solid plans coming out of the IMF in the near future.

However, as far as tomorrow goes… we'll just have to wait and see.

Disclosure: Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.

Comments

[Smarty_Pants:]

"The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place"

Front-page commentary in the People's Daily, the official newspaper of China's ruling Communist Party

Uh oh. That can't be a good thing.

www.reuters.com/articl...

2008 Oct 27 09:20 AM

[moonbat1775:]

""The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place" via Smarty

Ah, the Chinese are getting wise. Good for them. Let capitalism grow SOMEWHERE even if not in the USA.

Please, please, Chinese; adopt an honest banking system and put the West to shame.

2008 Oct 27 09:53 AM