Explaining Currency Fluctuations in an Era of Uncertainty
In today’s global economy, geopolitical tensions don’t just make the headlines—they shake financial markets, reconfigure trade flows, and disturb investor sentiment. And nowhere is this impact more visible than in emerging market (EM) currencies.
As conflicts erupt, allegiances shift, and sanctions start to take hold, EM currencies usually suffer from it first. To investors, policymakers, and observers, it is important to know how these currencies respond to global failures so that they can navigate through a volatile financial world.
Why Emerging Markets Are Hit Harder
Emerging markets are particularly vulnerable to geopolitical tensions based on a variety of structural factors. These economies generally have more dependence on foreign capital and exports than developed nations, and their financial systems are not always capable of withstanding unexpected shocks. Here’s why EMs tend to bear the worst of global tension:
- Greater dependence on foreign capital
- Smaller foreign currency buffers
- Regressing financial systems
- Commodity-based economies
- Continuing political instability or governance issues
As risk rises, foreign investors historically flee to safety—usually to instruments denominated in US dollars, Japanese yen, or Swiss francs. That precipitous outflow of capital sends EM currencies plummeting, triggering a domino effect: inflation, debt servicing expenses, and economic growth in reverse.
In short, EM currencies are worldwide financial shock absorbers during times of stress. Their sensitivity makes them exposed—but also incredibly responsive indicators of global risk.
Key Triggers: What Moves Emerging Market Currencies?
While “geopolitical risk” is an overarching term, some incidents are more likely to create a near-immediate and dramatic impact on EM currencies. The following are some of the most common triggers and why they matter:
1. Changes in Trade Policy
Rifts between big economies—like the US and China—usually result in tariffs or supply chain disruptions. Export-dependent EMs suffer when trade decreases, depreciating their currencies.
2. Regional Conflicts and Military Disputes
Conflicts, like the Russian-Ukrainian war, rattled energy markets and increase world uncertainty. EMs that are dependent on foreign energy see costs rising and currency strain.
3. Diplomatic Exclusion and Sanctions
Countries that become shut out of international trade or finance—like Iran or Venezuela—see currencies collapse with reduced investment and economic shunning.
4. Domestic Political Instability
Unexpected elections, leadership transitions, or unpopular economic reforms can chase investors out of town. Currencies such as the Turkish lira and Argentine peso have tanked due to domestic political melodrama.
Each of these triggers can trigger a wave of currency devaluation, and in the emerging markets, that wave can become a financial storm overnight.
Real-World Snapshot: Currency Drops After Major Events
To place this in perspective, here’s a look at how various EM currencies reacted to major geopolitical events in the last few years:
| Country | Event | Year | Currency Impact (vs USD) |
| Turkey | Coup attempt and political unrest | 2016 | -19.3% |
| Argentina | IMF bailout and election instability | 2019 | -25.4% |
| Russia | Sanctions following Ukraine invasion | 2022 | -27.8% (initial) |
| South Africa | Cabinet reshuffle and credit downgrade | 2017 | -11.2% |
| Brazil | Presidential corruption scandal | 2016 | -16.7% |
Statistics indicate currency depreciation within six months of the events.
These instances show how quickly currencies can spiral in the wake of political or economic shocks. Something that starts out as a local phenomenon can ring out to pure macroeconomic dislocation.
What Happens When a Currency Crashes?
A sudden collapse in a country’s currency does not happen in isolation. It ripples through the rest of the economy:
- Inflation Imports: Lower-valued currencies inflate the cost of imports, which leads to higher inflation.
- More Costly Debt Repayment: Countries holding US dollar-denominated debt are unable to service their debts.
- Flight of Investors: Declining currencies can deter short-term investors and long-term foreign direct investment (FDI).
- Slower Growth: To fight inflation, central banks tend to raise interest rates, thereby suppressing business investment and consumer buying.
In emerging economies, currency weakness can spread fast, influencing anything from the price of food to interest rates. It’s not a matter of exchange rates—it’s a matter of national financial stability.
How EMs Are Trying to Build Resilience
It is in spite of all these dangers that most emerging markets are seeking to build resilience. Some of the steps being taken to reduce currency vulnerability are:
1. Raising Foreign Exchange Reserves
A strong reserve position gives the central banks the ability to support their currencies during crises.
2. Diversifying Trade Partners
By diversifying trade away from a country or a bloc, EMs can reduce vulnerability to regionalized geopolitical risks.
3. Strengthening Debt Management
Issuance of more local currency debt and less foreign-denominated debt reduces repayment risk during periods of currency fluctuations.
4. Developing Trust through Transparency
Markets prefer transparency. Countries with transparent and independent central banks—like Chile and South Africa—are better equipped to ride out global shocks.
These measures do not avoid risk, but they allow EMs to survive the storm better and regain investor confidence faster.
Case Study: South Africa – Caught Between Risk and Resilience
South Africa gives a unique perspective into how an EM currency can both destabilize and stabilize at the back of pressure. The rand (ZAR) is used most frequently as a proxy for general EM sentiment due to its liquidity and volatility.
What Affects the Rand?
- Commodities: As one of the largest exporters of metals and minerals, South Africa’s economy fluctuates with global demand for commodities.
- Political Headlines: Scandals, cabinet reshuffles, and uncertainty (especially during the Zuma presidency) have frequently shaken the rand.
- Financial Market Strength: Despite its woes, South Africa’s well-developed capital markets and reliable monetary institutions have frequently been a stabilizing factor.
South Africa’s experience suggests that while EM currencies can be vulnerable, strong institutions and financial infrastructure can be just the buffer required.
FAQs: EM Currencies and Geopolitical Risk
Q1: Why are EM currencies more volatile than developed ones?
A: Because they depend more on foreign capital, have smaller reserves, and are often linked to commodity exports or weak political regimes.
Q2: Can EM central banks defend their currencies completely?
A: Not necessarily. Interventions help, but long-term stability is supported by policy strength and economic fundamentals.
Q3: What does higher US interest rates do to EMs?
A: They will depreciate the US dollar and trigger capital exits from EMs, leading to currency weakening.
Q4: Are there any EM currencies viewed as more stable?
A: Low-debt, institution-building economies like Chile or the Czech Republic appear to perform better during periods of global stress.
Final Thoughts: Currency as a Window Into the World
Emerging market currencies do not just tell us about exchange rates—they reveal the degree to which a country is connected to global systems, how well it manages its economy, and how investors perceive it. In a world where everything is up in the air, apart from uncertainty itself, such currencies are symptom as well as sign of underlying economic and geopolitical reality.
For investors, analysts, and governments, tracking EM currencies is more than a finance exercise—it’s a way of taking the pulse of the global economy in the moment.
