Recommend emerging currencies appreciate

Analysts advise that developing countries allow their currencies to appreciate to curb inflation freely in the region, rather than raise interest rates

With high food prices and energy threatening to return inflation to uncomfortable levels, many managers of monetary policy in emerging economies have started to raise rates or at least indicated that they are ready.

But most of them shows an unwillingness to allow their currencies to strengthen freely. On the contrary, central banks continue to buy dollars in the foreign exchange market, increasing reserves at approximately $ s850.000 million in 2007, according to JP Morgan.

The bank estimates that foreign currency reserves of emerging economies to expand at $ s390.000 million more this year.

"Emerging markets have a simple answer (to the threat of inflation): what to do all of them is to stop buying dollars, then the currencies will rise and the inflation problem will be solved," he told Reuters on Tuesday in New York Jerome Booth, head of research at Ashmore Investment Management.

So far, prices of agricultural commodities like corn, wheat and soybeans are trading at or near record highs.




The internal pressure from exporters, which become less competitive with a stronger currency, it is certainly playing a role in the persistent accumulation of dollars, despite the obvious financial costs of accumulating reserves in a currency that is depreciating.

But the time will come when the monetary authorities will have to pay the political price of stopping their purchases of dollars, according to Booth.

"I think we are observing each other to see who will move first," he said after speaking at a forum on emerging markets organized by Institutional Investor Events.

Poland on Wednesday raised interest rates for a second month and -25 basis points, said there would be more hikes in the future.

Colombia last week surprised the market with an unexpected 25 basis point hike in its key interest rate. Meanwhile, inflation concerns have been expressed recently by monetary authorities in several emerging countries, including Brazil, Mexico and Turkey.
"Inflation was a surprise in emerging markets," said Joyce Chang, head of emerging markets research at JP Morgan, investors in the same seminar.