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Monday, June 16, 2003

The Benefits of Exchange Rate Flexibility

The Eastern access countries are quietly avoiding the pitfalls of a high euro, by allowing their currencies to devalue. A sensible policy in my book, what a pity more eurozone economies cannot exercise this option!! Meantime mind the crash to be anticipated (Argentian style) in Bulgaria as the IMF promoted peg sends the Lev soaring skywards at the same time as the able bodied population are abandoning the ship.

The events of last week -- Hungary's decision to devalue its target band against the euro by 2.2% and confirmation by the European Commission that a narrow ERM band is the minimum exchange rate requirement pre-Euro entry -- have reinforced our view that this year will mark a significant depreciation of central European currencies against the euro. In the case of the Polish zloty and, to a lesser extent, of the Hungarian forint, this has already happened. However, we believe that the process is not yet over, and that at a later stage it will also affect the Czech and, to a lesser extent, the Slovak korunas.
Source: Morgan Stanley Global Economic Forum

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