The risks and potentials when investing in emerging market currencies

Image source: LOM Financial

In their process of economic advancement, emerging economies are slowly playing a more essential role in the international financial markets. For starters, emerging currencies from these developing nations have started to make up a relatively influential percentage in everyday currency trading.

For experts and investors alike, emerging currencies carry unique characteristics compared to their counterparts from economically powerful countries. These very same characteristics reflect their potential for growth – or failure.

Examples of countries with emerging currencies include the Brazilian Real (BRL), the Mexican Peso, and the Indian Rupee (INR). Since emerging currencies are from those countries which are still developing in terms of both political and economic structure, risks will always be around the corner. Dramatic changes in the state of these countries’ political climate can easily topple down a slowly growing currency.

Another quality that differentiates an emerging currency from currencies of larger economies is in terms of how these currencies can be dependent on foreign currencies. “Pegging” is a term used to describe such dependence and the most popular one is how the foreign U.S. dollar serves as a sturdy anchor for domestic currencies.

Nonetheless, seasoned investors know better than to shun emerging market currencies and completely disregard their benefits. Since they come from developing economies that are showing potential for growth especially in the industrial production sector, they attract a huge wealth of foreign capital investments.

Furthermore, emerging currencies’ volatility and fluctuations, when it comes to exchange rates against leading currencies, also open opportunities for traders and market participants because of the benefits and potential profit from these changes in prices.