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Exploring Developing Countries’ Dollar Exchange Rate Volatility

By Frances Coppola

Rising U.S. interest rates and tightening monetary policy are strengthening the U.S. dollar and making dollar exchange rates more volatile. For U.S. companies doing business in developing countries, these factors are increasing foreign exchange risk and clouding the outlook for international trade.

But each country’s unique economic circumstances help determine just how much the strong dollar affects its currency exchange rate.

 

In this six-part series, financial journalist Frances Coppola, regularly featured in the Financial Times, The Economist, Forbes and a range of other financial industry publications, explains how the strong U.S. dollar is causing problems for selected developing countries, creating specific challenges for U.S. businesses involved in import-export trade with those countries.

 

Part 1: Developing Countries’ Fundamentals Determine Their Fates When Dollar Exchange Rate Rises

 

The first article in the series identifies several general conditions that can make developing countries more at risk when the U.S. dollar exchange rate rises. These include current account deficits, funding fiscal deficits in foreign currency (which economists call “original sin”), and insufficient foreign exchange reserves. Read how developing countries’ economic fundamentals help to determine their fates when the dollar exchange rate rises.

 

Part 2: Economic Vulnerabilities That Caused Turkey’s Dollar Exchange Rate to Fall

 

Turkey is one of the countries affected most by the strong dollar. Its own economic problems—high corporate debt in foreign currencies, funding in dollars and lending in lira, and unstable exchange rates—have all contributed to its currency’s fall versus the dollar. Read more on the economic vulnerabilities that caused Turkey’s currency exchange rate to fall versus the dollar.

 

Part 3: Oil Prices Just Part of the Story of India’s Falling Dollar Exchange Rate

 

The rupee’s dollar exchange rate has fallen steadily throughout 2018, and India’s dependence on oil caused its current account to widen as oil prices rose for most of the year and the dollar strengthened. The government ¬appears to be supporting the rupee with import duties, but this could result in slower economic growth. Read the entire story of India’s falling rupee versus the dollar.

 

Part 4: Argentina’s Fragile Economy Is Particularly Vulnerable to a Strong Dollar

 

Argentina’s currency has fallen more than any other major developing country, likely caused more by the country’s own economic issues than the rising U.S. dollar exchange rate. What are those issues, and why have they caused such a dramatic currency exchange rate fall? Read why Argentina’s economy is particularly vulnerable to a strong dollar.

 

Part 5: Economic Fundamentals Add to Chinese Yuan’s Falling Dollar Exchange Rate

 

China often is in the spotlight when the U.S. dollar exchange rate rises. The yuan (CNY) has been on something of a roller-coaster ride since the People’s Bank of China devalued it in August 2015. The Chinese economy also is slowing down, and both government and corporate debt are high. Read how economic fundamentals are adding to the Chinese yuan’s fall against the dollar.

 

Part 6: Why Brazil, South Africa, and Indonesia are Vulnerable to a Strong Dollar

 

As the strong U.S. dollar causes exchange rate turbulence for developing countries, Brazil, Indonesia, and South Africa share common traits contributing to their dollar exchange rate volatility: fiscal and/or current account deficits and high public and/or private debt. Read more about why Brazil, South Africa, and Indonesia are vulnerable to a strong dollar.

 

Frances Coppola - The Author

The Author

Frances Coppola

With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.

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