The cases of Argentina and now Turkey show that when a country’s exchange rate begins to depreciate sharply, it becomes all but impossible to avoid a collapse of its currency. Emerging countries, therefore, need to rapidly arrest any downward movement in their exchange rates, in the view of analysts at Natixis.
A vicious circle is set in motion when an emerging currency begins to depreciate sharply
“If exchange rate depreciation sets in an emerging country, a self-reinforcing depreciation mechanism appears, as: Interest rates cannot be raised to a level that would offset the expected depreciation of the exchange rate; Imported inflation both leads to capital outflows linked to the search for an inflation hedge and worsens the country’s economic situation.”
“To prevent sharp exchange rate depreciation, an emerging country should therefore rapidly arrest any downward movement in its exchange rate through currency interventions, by regulating speculative positions in the currency, etc.”
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