By The dollar’s protracted decline presents developing nations with a perilous policy paradox – combat currency appreciation to safeguard exports or welcome the depreciation to ease dollar-denominated debt burdens.
The Export Protection Camp
- Thailand’s central bank has already spent $7.2 billion in forex interventions this quarter
- Brazil imposed 15% capital inflow taxes to slow real appreciation
- South Korea extended export subsidies worth $3.4 billion
The Debt Relief Camp
- Zambia’s dollar debt servicing costs dropped 22% in local kwacha terms
- Pakistan’s IMF repayment burden lightened by $600 million annually
- Argentina paused its dollar accumulation program
“The typical emerging market central bank faces a 0.5% GDP growth penalty for every 10% home currency appreciation against the dollar,” explains Morgan Stanley EM strategist James Lord. “But easing debt pressures could prevent sovereign defaults across Africa and South Asia.”
Market data reveals the impossible tradeoff:
- MSCI EM Currency Index up 14% YTD
- JP Morgan EMBI Sovereign Spreads tightened 85bps
- But EM export growth slowed to 1.2% in Q1 vs. 4.7% in 2024