You are here: Home » Opinion » Breakingviews
Business Standard

Tug of war

Wei Gu 

Volatility: Tensions are simmering at the Group of 20 meeting in Seoul. Western leaders want emerging market currencies to rise, and emerging countries said foreign hot money have added to their problems. The disunity isn't just a problem for politicians. It is also causing big headaches for companies investing across borders.

Bosses of emerging market businesses have two complaints. One is that rising domestic currencies hurt profits. For those who sell in dollars or euros, domestic currency appreciation will inevitably lead to short-term pains. But over the long run, stronger currencies will help to balance trade. Emerging market CEOs may just have to get used to that.

The other complaint, about short-term currency fluctuation, looks more valid. Businesses have to pay more to hedge their foreign revenues and costs. Currency fluctuation also raises the returns companies expect when they decide to add employment, capacity or new products in other countries. For countries who depend on foreign investment for their development, anything that delays needed investment flows should be a real concern.

Expected volatility on foreign exchange markets has fallen about 35 per cent from late 2008 levels, but remains elevated. The implied volatility of one-year options on yen, sterling and rupee has doubled from the level seen in mid-2007. Korean won option volatility almost tripled during the same period, according to Thomson Reuters data. Talk of currency wars and worries over US quantitative easing are the likely culprits.

Of course, not everyone fears volatility. Banks who sell currency hedges may welcome it. And even governments may appreciate some froth. China, for example, is keen for investors to feel like yuan appreciation isn't a one-way bet, and can go down as well as up. But G20 leaders may be prone to forgetting that wobbly currencies can be as much of a problem as undervalued ones. That makes compromise all the more important.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Fri, November 12 2010. 00:07 IST