The key factors behind the crash are oil prices, which have plunged to six-year record lows, undermining exchange rates of energy producers in Latin America and Russia; slowing growth in China and a tumbling yen that weighs on currencies across Asia, and surging demand for the US dollar, which is partly the result of speculation that US interest rates will rise.
An index tracking 20 key exchange rates has fallen to levels last seen more than a decade ago, Bloomberg reports. The index has lost 10.2 percent in 2014 and is heading for the biggest annual slide since 2008. Argentina’s peso and the Czech Republic’s koruna might lead to declines among 15 of 23 developing-nation currencies in 2015.
Argentina’s national currency tumbled around 20% after the local government devalued it in late January in a bid to jumpstart growth. The resulting drop in the peso was the worst since 2002 when the country defaulted on its debt. Back then, Argentina grew quickly following a deep recession that began when it stopped paying its creditors, but it never fully recovered its reputation on the international markets, says Peter Kinsella, a Senior Foreign Exchange Strategist in the FX Research department of Commerzbank in London.
"The problem with the Peso per say is that it’s quite hard to actually trade it, not many people do on the international markets. And certainly from an investment point of view, Argentina has been sub-investment grade for quite a long time, at least from an institutional investor point of view."
Developing-nation currencies are down 11 percent in 2014 on average, according to a Bloomberg index. Brazil's real dropped 12 percent against the dollar, Nicaragua’s cordoba fell 4.7 percent and Honduras's lempira dropped by 3.7 percent. Mexico’s peso is down about 11 percent, as the country has been hurt by tumbling oil prices, its biggest export. In what has been a tumultuous 2014 for Latin American currencies, it is Guatemala’s quetzal that has shone as the lone bright spot – it advanced 3 percent, posting its best annual rally since 2010. For Guatemala, a net importer of crude, the oil plunge has been a boon. Only three currencies in the world – Somalia’s shilling, Pakistan's rupee, and Sudan's pound – gained more than the quetzal in 2014, Bloomberg reports.
Ukraine’s grivna topped the list of the world’s worst-performing currencies in 2014 as the country faced its third recession since the 2008 global financial crisis. The grivna has been in free fall, losing nearly half of its value against the US dollar.
The year has been quite hard on the Russian currency as well. In November it faced an unbelievable plunge of 52 percent against the US dollar and 39 percent against the euro. Some say the Russian currency came under pressure amidst escalating tensions between Russia and Ukraine. Peter Kinsella at Commerzbank is one of those who believe that the weakening ruble is not a very recent trend.
"The weakness you’ve seen this year is really a continuation of ruble weakness that you saw pretty much in the last six months of 2013, and this is the reflection of quite high inflation and low growth."
Overall, Kinsella says, looking at the emerging market currencies over the last decade, growth has been the primary reason why investors would buy them. And as long as growth forecasts in most of the emerging markets are zero or even negative, national currencies will be under severe pressure.
