The major reason for this is the rocketing aversion towards emerging markets. An event that had its effect on this is the surprising increase in interest rates in Hungary by 300 basis points, from the level of 8.5% to the level of 11.5%. This was a step made in order to help the Hungarian Forint and bring back confidence to the region, but the outcome was unfortunately opposite to expectations. Investors interpreted this information as a signal that all is not well with regard to the Hungarian economy, which caused the major outflow of capital from the whole region. Even though the Polish economy is decisively in a better state than the Hungarian economy where both inflation and interest rates are high, investors seem to believe that the credit crunch can in the near future affect middle and eastern Europe.

Another factor that did affect the Polish zloty is the further fall on the EURUSD market, pushed by opinions that the European Central Bank may in the near future decrease interest rates in order to aid the ailing European economy. What has to be underlined is that the Euro has not been as week against the US Dollar since October 2006.

Though the Zloty started to strengthen against all major currencies on Friday, I believe that the further weakening of the Polish currency will continue, at least until sentiment towards emerging markets returns

Omar Arnaout