Sudden Stop: The Risk of an Emerging Markets Crisis
U.S. Dollar strength has put emerging markets under pressure
Argentine President Mauricio Macri at the Casa Rosada presidential palace in Buenos Aires on January 17, 2017. After years of socialist mismanagemet, his government is struggling with a legacy of money printing as the currency dropped 30 percent against the dollar in 2018. EITAN ABRAMOVICH/AFP/Getty Images
The recent collapse of the Argentine Peso and other emerging currencies is more than a warning sign. It could be the infamous “sudden stop.”
This phenomenon happens when the flow of cheap U.S. dollars into emerging markets suddenly reverses and the funds return to the United States looking for safer assets. The central bank “carry trade” of low-interest rates and abundant liquidity was used to buy “growth” assets in emerging markets.
