The Rise of the Emerging Markets (EM) Currencies
The Rise of the Emerging Markets (EM) Currencies
International currency investors report.
The rise of the emerging market currency is truly inevitable, and sources have clearly indicated the fall of U.S. Dollars. Over the past years, U.S. Dollars dominated the international currency as the popular currency with an excellent reputation of being stable and acceptable currency for trade globally. Nevertheless, change is inevitable that the dollar has lost its once held predominant position, and other countries have now taken over the position. In the previous years, China’s Yuan renminbi has shown incredible growth in the international trade by dominating the international currency exchange market (Frankel J, 2010).
Furthermore, Frankel states that some people argue this is the commencement of a move that will see China’s currency displacing the US Dollar and take over the international reserve currency in ten years to come. Sources argue Yuan renminbi gets flaunted as the next magnificent international currency. Within a period, the last two to three years Chinese renminbi has grown internationally along a number of proportions.
Many international exports of electrical and heavy machinery have been propelled by china resulting in rapid growth of foreign markets. In addition, A Yuan bond market has developed swiftly in Hong Kong, and one in Chinese currency bank deposits. As a matter of fact, some of China’s intercontinental business gets currently invoiced in the currency. Some countries like Malaysia have been able to hold China’s currency since August last year but one. The dollar stands on the losing end could an Intercontinental currency ranking exercise be conducted within a decade. The foundation of this forecast gets the likelihood that the US economy size would be surpassed by Chinese growing market expansion. Secondly, the historical instance when the dollar overthrew the sterling pound as the first global currency during the period just after the First World War.
In the last century, economists thought that the global currency status got subject to much force. It is not clear when the US Dollar surpassed the Sterling pounds and dominated over it. However, some argue that, after the Second World War, the international central banks holdings set the ranks and the dollar overtook the pounds. Additionally, the criterion used to measure the strength of the country’s currency was the market size and market share globally. The dollar appeared on the three international currencies to have attained international status during the twentieth century. The other two currencies were the mark and Yen, which emerged key intercontinental currencies after the downfall of the Bretton Woods system in early 1970’s (Frankel J, 2010). Today, things have changed, and Chinese Yuan renminbi is the new talk of the day.
Renminbi gets presumed to have taken the number one slot since it is the key currency that holds the currency reserve position with a large market share. The present Yuan occurrence varies from the historical incidences of the rise of the former three currencies in which the government of China is promoting the intercontinental use of its currency. This is a different approach that neither of the formers countries such as Japan, Germany or US attempted doing or actually did.
Former currency “super powers” took up their positions through differed financial sectors, but China’s case is different since it has begun by dominating its interior before extending to the exterior reign. Oliver, C. (2012) projects, that focusing on the how China continues to expand its economic control over the globe, improving its financial markets and experimentation with the liberalization of its currency, the Yuan/renminbi unsurprisingly appears as a potential reserve currency. Basing on the co-current statements by Frankel and Oliver among others renminbi gets set to replace the US dollar as the most famous currencies to hold.
As a matter of fact Oliver argues that the recent US economical crisis led to its currency downgrade, which poses doubts on the dollar rising above the renminbi currency internationally. Furthermore, the favorable conditions for Chinese economic growth get set to overtake US economy before year 2030 as projected by Goldman Sachs. Furthermore, it is worth to note that China’s economic power makes the gauge needed for the development of liquid and bottomless monetary markets.
The exchange rate of Mexican Peso (one of the emerging market currencies) gets determined in a floating exchange rate system. In figure one as presented by Banco de Mexico, inflationary impact of the devaluation got contained in a tight financial policy implementation. By implementing that policy, the currency got value and provided a stable position of the currency; hence determining the required exchange rate for EM currencies. In addition, the floating exchange rate helped in providing Mexican peso with the power to inculcate its stable financial position. A monetary effort got necessary, to begin absorbing some of the costs of the banking sector rescue package (Carstens G & Werner M, 1999).
The exchange rate in India Rupee (one of the emerging market currencies) like the Mexican floating rate, the Indian inflationary effect, gets also contained in a tight devaluation to protect its currencies from losing value. Rupee foreign exchange value improved since the realization of the US downgrading effect. In 1992, India’s exchange rate, got partially floated, and in the following year it then fully floated and remained convertible upto date (Joy and Kumar 2011).
The emerging market currency trading is trending on a risky path since globalization and increased foreign exchange flow of funds have increased periodically leading to the exposure of a market risk. Hedging of such market risks exposures has become a critical measure that nations must take to safeguard the future currency exchange. For the country to maintain its expansion momentum the in a long run, an efficient hedging plan must be put in place, which would enable coping better against its currency exposure is fundamentally necessary.
The international market currency investors should be cautioned against the market risk embedded on cross-border flow of funds. Whenever, they find a fixed exchange rate their market growth will be stagnant and little or fewer developments will be noted. They have to focus on the long run and effective hedging mechanism, which would protect them from exchange rate risks in foreign exchange markets. Since a currency derivative gets already introduced, the exporters and importers get the benefits of getting exposed to the currency exchange markets.
Through this research, I have learned various facts and terms about the foreign exchange rates such as fixed exchange rate system and floating exchange rate system. Furthermore, a clear insight on the risks involved in foreign exchange markets and the remedy of exposure on market risk. In addition, I have realized how China is rapidly growing to take over US currency reserve through its widening control over the global market.
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