Moreover, some emerging market currencies are joining the club of international currencies for the first time.

Since then, most emerging market currencies have rebounded sharply.

Since then, emerging market currencies and fixed income securities (government and corporate bonds) have taken a hit.

But, while that implies that emerging market currencies must strengthen, disorderly appreciations would do more harm than good.

South Korea, Brazil, and other emerging market countries are also attractive diversification investments, causing their currencies to appreciate.

SANTIAGO With the currencies of Malaysia, Indonesia, South Africa, Turkey, Brazil, Colombia, Chile, and Mexico hitting record lows recently, currency traders around the world are asking How much further can emerging market currencies weaken?

It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging market currencies.

The performance of emerging market currencies and other assets so far in the second quarter suggests that deleveraging has begun once again.

As emerging market central banks leaned against heavy capital inflows in order to mitigate exchange rate appreciation, their currencies became less volatile.

Moreover, some emerging market currencies are joining the club of international currencies for the first time. Indeed, some analysts have suggested that the Chinese renminbi may rival the dollar as the leading international currency by the end of the decade.

The existence of alternatives to the dollar will mean that the issuers of internationally used currencies will feel market discipline earlier and more consistently.

Foreign investors are already reshuffling their portfolios, moving into euros, pounds, and even emerging market currencies like the Brazilian real and the South African rand.

But the market forces that cause those currencies to appreciate do not work on the renminbi, because China has only very limited capital account convertibility.

The normal response of emerging market central banks to bubbles or inflation would be to raise interest rates thereby increasing their currencies value still more.

Collapsing emerging market currencies, and the resulting trade pressures, will make it all the more difficult for them to prevent their unemployment levels from rising significantly.

Exchange of currencies

The overall trade weighted value of the renminbi has thus declined significantly, particularly relative to the currencies of the emerging market countries with which Chinese producers compete.

The pressure on China is, however, entirely consistent with the broader US policy of encouraging countries to allow the financial market to determine their currencies exchange rate.

Ideally, Asian currencies would rise much more than 15 while European currencies would rise less.

But the very fact that there are questions about all three currencies means that none of them will obviously dominate. There will be an international market for all three.

Some countries devalued their currencies.

Wanted Chinese Leadership on Currencies

A single currency also means a common exchange rate relative to other currencies, which, for any country within the euro zone, precludes a natural market response to a chronic trade deficit.

A World of Multiple Reserve Currencies

That is also true of currencies.

Efficiency dictates the use of fewer and larger currencies (and foreign investors, understandably wary of weak and volatile currencies, demand it).

Moreover, emerging market countries representation in global governance did not keep pace with the increasingly significant role of their economies and currencies. These countries very success thus became an obstacle to policy coordination.

Tensions are rising over currencies as well.

But that's just part of the story. You have a similar trend with currencies currencies going through an extreme time of stability.

This is particularly true with respect to lending in foreign currencies to economic agents that do not have revenues in those currencies.

However, some claims were presented in other currencies, and some others were presented in United States dollars after conversion from other currencies.

This was all implicit in the European Union s single market initiative. The eurozone went one step further, aiming through monetary unification to eradicate fully the transaction costs associated with national currencies and exchange rate risk.

These risks explain why the Fed s mere suggestion of a potential move toward reducing its purchases of long term asset (so called quantitative easing) caused emerging market currencies and asset prices to plummet this summer.

These include emerging markets long term growth differentials relative to advanced economies investors greater willingness to diversify beyond their home markets and the expectation of long term nominal and real appreciation of emerging market currencies.

depreciation of nonconvertible currencies. In 2004, the amount written off plus the adjustment for overvaluation of cash held in nonconvertible currencies totalled 2.7 million.

Expanding the basket to include emerging market currencies would help, but only a little, because the US and Europe still account for half of the world economy and more than half of its liquid financial markets.

Moreover, the eurozone itself is a mini gold standard, with heavily indebted members unable to devalue their currencies, because they have no currencies to devalue.

So products were developed that allowed investors to borrow easily in several currencies at once and invest in a portfolio of high interest rate currencies.

To be sure, all three currencies have their critics.

Given that the renminbi s real and expected rates of return are higher than the real rate of return of other currencies, it has become a positive carry against foreign currencies, reinforcing the tendency to hold assets in renminbi and liabilities in foreign currencies.

Reduced European dependence on the US export market can hardly protect Europe from the effects of the US economic slowdown if the euro appreciates as much against the key Asian currencies as it has against the dollar.

And floating and fixed exchange rate regimes coexist uneasily, because volatility tends to affect the floating currencies (often the euro, and recently the Latin American currencies).

Will exchange rates between the major currencies be dangerously unstable? Will those responsible for managing central bank reserves, seeking to maximize returns, shift erratically between those currencies?

Prohibition of certain transactions for prudential reasons also makes sense, particularly for borrowing in foreign currencies by economic agents that do not have revenues in those currencies.

The regular resources cash balance at the end of 2004 was 329 million, consisting of 318 million in convertible currencies and 11 million in non convertible currencies.