Although China’s recent weakening of the RMB has been – as far as currency depreciations go – relatively modest, the effect is being felt far and wide. As testament to just how important and central China now is the world economy, last week’s revaluation has had a deleterious result for many emerging market economies.

On Monday August 17, the Turkish lira, Mexican peso and South African rand all hit new lows against
the dollar

On Monday August 17, the Turkish lira, Mexican peso and South African rand all hit new lows against the dollar, while the South East Asian leaders Malaysia and Indonesia saw their currencies decline to the lowest price levels since the 1998 Asian Financial Crisis. With many emerging market economies being reliant upon Chinese economic growth and exports, investors are, according to the Financial Times, “in a sell-first, ask-questions-later mood at the moment.”

Likewise, Bloomberg has identified a set of emerging market currencies, termed the “troubled ten,” said to be particularly vulnerable from China’s currency devaluation. This grouping is composed of the Taiwan dollar, Singaporean dollar, Russian rouble, Thai baht, South Korean won, Peruvian sol, South African rand, Chilean peso, Columbian peso and the Brazilian real.

“It’s all about vulnerability,” Hans Redeker, the London-based global head of foreign-exchange strategy at Morgan Stanley, told Bloomberg. “Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China.”

The fear is that these currencies will further weaken as interest rates in developed economies – principally the US – rise. The resulting currency strengthening that a rate rise will bring will further push down the value of the above mentioned emerging market currencies.