Foreign currencies – especially the Emerging Markets – are having one of their worst years on record.
And investor anxieties aren’t easing up. . .
I wrote two weeks ago about the strong dollar and the chaos it’s creating for the Emerging Markets. But many don’t realize just how bad things have gotten. And it’s all thanks to the Federal Reserve’s tightening and quantitative tightening.
For starters, let’s just take a look at some of the worse performing currencies this year. . .
First – The Turkish Lira
I wrote a very bearish assessment of Turkey and their currency – the Lira – back in early March.
And since then, the crisis in Turkey has dominated the news stream.
A big reason for Turkey’s currency crisis stems from the fact that their external debt burden has soared over the last few years. This means that Turkey borrowed significant amounts of U.S. dollar denominated debts (and euros).
Remember: when the dollar gets stronger – and when the Federal Reserve raises rates – the external debt burden gets harder to service.
And because the country has had a plaguing inflation problem over the last couple of years – this caused the Lira to slowly depreciate on foreign exchange markets.
But due to the U.S. dollar’s shocking rally since March 2018, the Lira really started to collapse. For instance, more than a third of its value got wiped out in just the last 30 days.
Making matters worse – the Turkish Central Bank Deputy Governor is rumored to resign. And Moody’s just downgraded the credit ratings of 20 Turkish financial institutions – such as banks.
Turkey’s increasingly fragile economy and currency signals that things are still far from over. . .
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