Answer to Question #50755 in Macroeconomics for sangz

Question

Currency fluctuations of emerging economies are not prone to the behaviour of hard currencies. Explain.

Answer 1

Emerging market currencies are unique in several respects. Because emerging market countries are developing economically and/or politically, there are special risks that come with investing in emerging market currencies. Political risk is always a concern for international investors, but emerging markets tend to have an even greater uncertainty in the political arena. Another unique feature of emerging markets is the structure of their currencies. Most of the larger economies, such as the United States, the United Kingdom, Japan and Canada, have independent currencies that are allowed to float relatively freely. In contrast, many emerging market countries do not allow their currencies to float freely. One popular form of governing the currency is "pegging" the domestic currency to a foreign currency. This foreign currency is commonly the U.S. dollar or a "basket" (group) of developed-nation currencies, such as the U.S. dollar, the euro and the yen. For instance, Hong Kong manages its currency in a range against the U.S. dollar, while China's currency floats in a range against a basket of foreign currencies.