Emerging markets the true victims of financial turmoil

Santiago

WITH the currencies of Malaysia, Indonesia, South Africa, Turkey, Brazil, Colombia, Chile and Mexico hitting record lows recently, currency traders around the world are asking: How much further can emerging-market currencies weaken?

The standard approach to answering this question takes a relatively normal base year and measures how much a country's currency has depreciated since then. That number is then adjusted for the inflation differential between the country and its trading partners. If the resulting real exchange rate is not too far from that of the base year, the market is said to be in equilibrium, and little or no further depreciation should be expected.