The USD has to some extent lost its safe-haven status in connection with the ongoing financial market turmoil. In part due to the weaker USD and lower interest rates in the US we are probably heading for a period when currency regimes around the world will be increasingly questioned.
Most obvious, of course, will be the countries that fully or partly peg their currencies to the USD - which is primarily a number of countries in Asia and the Middle East. In Asia there has been speculation in recent weeks on a major revaluation of the Chinese CNY and a widening of the fluctuation band for HKD.
Put simply, the costs of maintaining the link to USD have been rising. First, it is becoming less and less compatible with the price stability goals of many countries. Second, the cost of accumulating foreign currency reserves in US assets is increasing as the USD weakens and US interest rates fall (see figure).
In eastern Europe too, a number of currency pegs are being increasingly questioned. Here, though, the problem is more one of overvalued currencies tied to an ever strengthening EUR. The Baltic currencies are an example of this, and particularly in Lithuania and Latvia the interest rate spread has widened considerably of late due to market fears of devaluation.
