Emerging market currency wars could hit global trade hard.
Weakness in emerging market currencies is hurting global trade by reducing imports without any benefit to export volumes, according to Financial Times research on more than 100 countries.
The findings suggest that any currency war between developing nations is likely to be even more damaging than previously thought, leading to a reduction in global trade and possibly economic growth, rather than just reapportioning a fixed level of trade between “winners” and “losers”.
The analysis coincides with concerns that some countries are engaging in competitive devaluations in order to undercut their neighbours and steal market share.
“We risk slipping into a beggar thy neighbour, competitive spiral of currency overshoots and volatility that go with that,” said Mohamed El-Erian, chief economic adviser to Allianz and chairman of US president Barack Obama’s Global Development Council.
Since June 2014, the currencies of Russia, Colombia, Brazil, Turkey, Mexico and Chile have fallen between 20 per cent and 50 per cent against the dollar, while the Malaysian ringgit and Indonesian rupiah are at their weakest since the Asian financial crisis of 1998.