Yuan, Euro Rout Points to Losses for Emerging-Market Currencies

The recent depreciation of the Chinese yuan and the euro has raised concerns about potential losses for emerging-market currencies. As the world's second-largest economy, China's currency movements have significant implications for global financial markets. Similarly, the euro, being the world's second most widely held reserve currency, also plays a crucial role in international finance. This article explores the impact of these currency routs on emerging-market currencies and the factors contributing to their vulnerability.

The yuan's depreciation, which began in late 2021, has accelerated in recent months, reaching its lowest level since 2008. This decline can be attributed to a combination of factors, including China's slowing economy, geopolitical tensions, and the country's zero-COVID policy, which has disrupted supply chains and dampened investor sentiment. The euro, on the other hand, has been under pressure due to the European Central Bank's (ECB) dovish monetary policy stance, which has led to a widening interest rate differential with the United States.

The depreciation of these major currencies has spillover effects on emerging-market currencies, which are often more vulnerable to global economic uncertainty and financial market volatility. A study published in the Journal of International Financial Markets, Institutions and Money (2024) found that global uncertainty, rooted in policy uncertainty, as well as U.S.-based uncertainty related to monetary policy and financial conditions, directly impacts various exchange rate conditions in emerging and advanced economies. The research, using a global vector autoregression (global VAR) model, analyzed the impact of uncertainty shocks on the global economy over a period of 26 years, including several significant episodes of uncertainty, such as emerging market currency crises, recessions, and the Covid-19 pandemic.

The findings suggest that emerging markets with stronger macroeconomic fundamentals and higher resilience are better equipped to weather currency storms during periods of heightened uncertainty. A study published in the Journal of International Money and Finance (2024) found that emerging markets with robust fiscal positions, low inflation, and strong institutional frameworks are more likely to maintain currency stability during periods of heightened uncertainty. The authors, drawing on data from 28 countries plus the euro-zone from 1996 to 2022, analyzed the impact of uncertainty shocks using a global vector autoregression (global VAR) model.

The recent depreciation of the yuan and euro highlights the vulnerability of emerging-market currencies to global uncertainty. However, the resilience and macroeconomic fundamentals of these markets play a crucial role in their ability to withstand currency pressures. Investors should consider the resilience and macroeconomic fundamentals of emerging markets when evaluating their currency risk exposure.

In conclusion, the recent rout of the yuan and euro points to potential losses for emerging-market currencies. However, the impact of these currency movements on emerging markets depends on various factors, including their macroeconomic fundamentals and resilience. As global uncertainty persists, investors should monitor the performance of emerging-market currencies and consider their underlying strengths when making investment decisions.