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‘Losing Battle’ for Emerging Market Central Banks

Row of beach houses
Erik Von Weber | Stone | Getty Images
Row of beach houses

Emerging market central banks keep trying to keep their currencies down, but it's a fight they can't win.

Ho hum. Another week, another market intervention announcement by an emerging market central bank, this time Brazil. And guess what? The Brazilian real strengthened.

Emerging market central banks keep trying to keep their currencies from rising too far, but traders are determined to keep buying the real, the South Korean won, the Philippine peso - and more. With risk appetite returning, the high yield these currencies offer relative to the staid old yen and dollar is just too tempting.

"The lines in the sand have moved," Win Thin, global head of emerging market strategy at Brown Brothers Harriman, told me. "They can't reverse it, and I think they know that, but they're trying to slow the move."

Thin believes many emerging market central banks should quit trying to stall their currencies, and instead raise interest rates to avoid runaway inflation. "Inflation pressures are definitely there, and they are back to full employment. They are worried about exports and growth, but I think that's misplaced," he said, noting that some of these markets grew in the 6% range last year and are on track for 4% to 5% growth in 2011.

How should you trade on this tug of war? Join the party, apparently. "Flows will still move into emerging markets," Thin said. He expects "slower and steadier" appreciation this year after last year's big increases, but he does anticipate emerging market currencies continuing to rise.

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