Currencies: Devaluation - where next?
Following recent devaluations in the Philippines peso, Thai baht, Czech koruna and, latest, the Indonesian rupiah, international bond investors are asking themselves, where next? A report by Deutsche Morgan Grenfell points to the mounting pressure on such currencies as the Malaysian ringgit, Brazilian real and Greek drachma.
DMG chief economist Steven Bell says the explosive growth in international capital market flows at a time when many countries are attempting to fix their exchange rates has led to a situation where more exchange rate declines are likely to be forced on reluctant governments.
"At a time when the world economy is expanding and inflation is stable, investors who are becoming wealthy at home are much more willing to invest outside their region." This, says Bell, along with improved communications, is serving to increase investors' appetite for novel instruments.
Pegging an exchange rate to a hard currency is all very well as a way of tackling high domestic inflation, he says. It also helps to promote financial stability in the short term. However, if at the same time the authorities strive to keep domestic interest rates high - as a means of giving investors the required risk premium - the result is strong capital flows as arbitrageurs get wind of the opportunity.