Just three months after the biggest developing economies solddollars to support their currencies, policy makers from Colombia toChina are moving to weaken exchange rates and revive exports as theInternational Monetary Fund forecasts the slowest trade growth inthree years.

Colombian Finance Minister Juan Carlos Echeverry urged thecentral bank on Aug. 3 to boost minimum dollar purchases from $20million a day, saying the country needs “more ammunition” to drivedown the peso in the global “currency war.” The Philippines bannedforeign funds from deposit accounts and unexpectedly cut interestrates in July as the peso hit a four- year high. In China,authorities lowered the yuan reference rate to the weakest sinceNovember, which according to Citigroup Inc. will create “headwinds”for other Asian currencies.

After spending more than $59 billion in foreign reserves in Mayand June to stem currency depreciation, developing nations arereversing policies as the European debt crisis outweighs the riskof faster inflation. South Korea and Chile may weaken exchangerates to make their exports cheaper, according to UBS AG. The IMFestimates global trade will expand at the slowest pace since2009.

“Policy makers will become more aggressive,” said Bhanu Baweja,a London-based strategist at UBS. “The currency strengthening is incontrast with the state of the economy. That argues for much weakerforeign-exchange rates.”

Options traders are bracing for wider currency swings in someemerging markets in coming months. The gap between impliedvolatility on one-year and three-month options for the South Koreanwon widened to a 10-year high of 2.85 percentage points on July 12,from 1.96 percentage points two months earlier, according to datacompiled by Bloomberg.

Bank of America Corp. lowered its end-September forecast for theyuan on July 25 to 6.45 per dollar from 6.30, saying “downsidegrowth and disinflationary risks” may prompt China to let itscurrency depreciate. The new forecast represents a 1.4 percentdecline from yesterday's close.

“People aren't expecting currency appreciation from emergingAsia anymore,” said Albert Ma, a Taipei-based bond fund manager atPineBridge Investments LLC, which oversees $67 billion of assetsglobally. “These countries are mainly export- oriented. They'd wanttheir currencies to be weak when the global economy is going thisbad.”

Just three months ago, policy makers were taking steps to propup exchange rates when emerging-market currencies, as measured byJPMorgan Chase & Co.'s ELMI+ Index, lost 5.9 percent in May,the most since September.

Debt Crisis

As the deepening European debt crisis led investors to retreatfrom developing nations, central banks drew on foreign- exchangereserves to limit declines, causing a combined $19.7 billion dropthat month in Brazil, Russia and India, official data show. China'sholdings, the world's largest at $3.24 trillion, fell $65 billionin the second quarter.

Since May, the ELMI+ index has climbed 4.4 percent as Europeanpolicy makers pledged to tackle the crisis and record- low yieldson U.S. Treasuries and German bunds spurred demand for riskierassets. Emerging-market bond funds have taken in more than $46billion this year, surpassing the $43 billion of inflows in thewhole of 2011, according to JPMorgan.

Chile's peso advanced to the strongest level since September onAug. 9, approaching levels that prompted the central bank to buydollars in 2008 and 2011. The peso declined for a second dayyesterday, falling 0.6 percent.

The won, which reached a four-month high on Aug. 9, strengthened0.1 percent today. Malaysia's ringgit gained 0.2 percent aftertouching its strongest level since May on Aug. 7.

The currencies are rebounding as slowing exports drag downeconomic growth in developing countries. The global trade expansionwill ease to 3.8 percent this year, from 5.9 percent in 2011 and12.8 percent in 2010, according to the IMF. China's export growthcollapsed to 1 percent in July from an average 18 percent over thepast seven years as demand from Europe, the country's largesttrading partner, declined.

“We have a growth problem in the global economy,” MichaelGanske, the head of emerging-market research at Commerzbank AG inLondon, said in a phone interview. “Emerging-market central bankscan't let their currencies appreciate on the back of portfolioflows to the point it kills exports.”

'More Diverged'

With Asian and Latin American currencies down about 9 percentsince their peak in July 2011, policy makers aren't worried abouttheir nations' losing competitiveness, said Kieran Curtis, whohelps oversee $4 billion in emerging-market debt at Aviva InvestorsLtd. in London.

“We haven't seen particularly broadly based intervention,”Curtis said. “I don't think they are all seriously concerned aboutthe currency strength. It's more diverged.”

All except four of 25 emerging-market currencies tracked byBloomberg have weakened over the past 12 months. Brazil's real lost20 percent against the dollar in that period as the Hungarianforint fell 15 percent.

In Colombia, it's a different story. The 26 percent gain in thepeso since 2008 threatens to undermine local industry and farmers.Flower growers cut 30,000 jobs in the past seven years because ofthe peso's rally, according to the Association of Colombian FlowerExporters. Echeverry said Aug. 8 that he has asked the central bankto double its daily dollar purchases to $40 million.

“We are in a currency war, and those who don't fight lose,” hesaid in an interview in Bogota on Aug. 3.

In the Philippines, the central bank tightened rules on capitalinflows last month by prohibiting foreigners from parking funds inso-called special deposit accounts. Policy makers also cut thebenchmark interest rate by a quarter- percentage point on July 26to a record 3.75 percent, a move that Deputy Governor DiwaGuinigundo said will help “temper” peso gains. The currency's 4.6percent advance versus the dollar this year is the best performancein Asia. The peso fell 0.1 percent today.

South Korea, which sent a combined 44 percent of its overseasshipments to China, the U.S. and the European Union last year, willstep up monitoring foreign purchases of won- denominated debt, ShinHyung Chul, director general of the treasury bureau at the Ministryof Strategy and Finance, said in an Aug. 8 interview in Seoul.

Overseas Holdings

Overseas investors boosted bond holdings by 1.4 trillion won($1.2 billion) to a record 89.7 trillion won in July, or 17 percentof the total outstanding, government figures show.

After keeping its currency little changed during the 2008-2009financial crisis, China has allowed the yuan to depreciate thisyear. The central bank set a reference rate of 6.3456 on Aug. 13,the weakest level since November. The daily fixing, around whichthe currency is allowed to fluctuate by as much as 1 percent, wasreduced 0.7 percent in the past three months, the most since a pegended in 2005.

The Czech Republic's central bank may weaken the koruna by about10 percent against its trading partners to help the export-ledeconomy recover from recession, according to Bank of America. A 10percent depreciation will lead to as much as a 5- percentage-pointincrease in exports, Mai Doan, a London-based economist, wrote in areport to clients on Aug. 6.

Pressure for emerging-market currencies to appreciate maypersist as central banks in developed nations boost monetarystimulus to revive growth, according to Frances Cheung, astrategist at Credit Agricole CIB in Hong Kong.

The Federal Reserve said Aug. 1 it will pump fresh funds intothe economy if necessary to bolster growth. European Central BankPresident Mario Draghi said the following day that policy makerswill buy shorter-maturity government securities to help quellturmoil in the region's debt markets.

The U.S. central bank bought $2.3 trillion of mortgage andTreasury debt from December 2008 to June 2011 in two rounds ofso-called quantitative easing, sending the dollar to record lowsagainst its trading partners. In response, countries from Brazil toChina bought dollars to curb their currency rallies, boostingforeign reserves in the eight largest developing economies 46percent in the three years through 2011, according to data compiledby Bloomberg.

Developing countries “don't want a strong currency, losingexport momentum and losing domestic momentum,” said PhillipBlackwood, who oversees $2.9 billion in emerging-market debt as amanaging partner at EM Quest Capital LLP in London. “They want toboost GDP as much as possible. A weaker currency is another measurethey can use.”

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