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The intensification of the financial crisis in September 2008 inspired a significant reversal in capital flows, away from developing countries and toward high-income countries, notably the United States.
The need to repatriate liquid assets to cover losses elsewhere and an increase in home bias on the part of global investors, caused the currencies of almost all developing economies to depreciate against the U.S. dollar.
The collapse in commodity prices also played a role in exchange-rate depreciation for developing commodity exporters, such as Argentina, Brazil, and the Russian Federation, and also for high-income commodity exporters such as Australia and Canada.
In the immediate aftermath of the crisis, only a few currencies appreciated or held their ground against the dollar, among them the Chinese renminbi and the currencies of several oil exporters that are pegged to the dollar.
Many developing countries depreciated by 20 percent or more, but the extent of depreciation was much less severe in real effective terms—because most currencies depreciated against the dollar simultaneously.7
The depreciation of developing countries’ currencies has meant that the local currency price of many commodities fell much less sharply than the dollar price of these commodities.
For example, the Brazilian price of internationally traded wheat and oil fell by 12 and 25 percent, respectively, between July 2008 and February 2009, contrasted with a drop of 25 percent and 65 percent in dollar terms.
In addition, the depreciations have increased the local currency cost of servicing dollar-denominated debt.
While depreciation will improve the competitiveness of affected countries, the extent to which this can be translated into increased exports will be diminished by the depressed state of world demand.
7 The real effective exchange rate is an index of a country’s exchange rate with that of its key trade partners (weighted by export and import shares) and corrected for inflation differentials.
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