Emerging-markets assets have suffered considerably since the Federal Reserve began talking earlier this year about the gradual reduction of monetary stimulus. Emerging-markets currencies in particular have taken it on the chin. As chart 1 shows, the aggregate emerging-markets exchange rate in nominal terms has depreciated by nearly 10 percent since May. That move has come despite essentially no weakening in the most important emerging-markets currency, the Chinese renminbi. Several high-profile currencies have tumbled considerably more, including the Indian rupee (22 percent) and the Indonesian rupiah (17 percent). Even the Mexican peso, a market darling at the start of 2013, has slipped roughly 11 percent since the second quarter. With this year’s round of turbulence following on the heels of slides in 2011 and 2012, emerging-markets currencies have unwound nearly all of their appreciation from their 2009 trough.

Chart 1: EM FX Index

Source: Bloomberg; data through August 30, 2013

The connection between Fed tightening and this bout of currency depreciation has shone a spotlight on emerging-markets current-account deficits, a typical culprit in past foreign exchange crises. As global credit conditions tighten — with the prospect of higher developed-economy interest rates dampening capital outflows bound for developing countries — funding for current-account deficits becomes scarcer, forcing a combination of slower emerging-markets growth and competitiveness-boosting currency depreciation to narrow those shortfalls.

This narrative, however, does not entirely explain the present episode. With emerging-markets GDP growth having run below its underlying trend since mid-2011, current-account deficits have not widened much in aggregate in the past couple of years and do not look large by longer-term standards. Indeed, by almost any metric, emerging-markets economies do not appear to be overheating.

Indeed, in a cross-country sense, current-account deficits and forex depreciation during the past few months do not display a strong link. Chart 2 shows, for a sample of 20 emerging-markets economies, the projected current-account deficit for 2013 as a percentage of GDP, along with the nominal depreciation of the currency against its main natural trading partner (either U.S. dollars or euros, or a basket of the two in the cases of Russia and Turkey) since the beginning of May. The chart suggests some connection but also implies that there is more to the story. Indeed, a simple regression of forex depreciation on the current-account deficit produces an adjusted R-squared of just 0.25. The biggest fall has come in India, with a fairly moderate current-account deficit at 4 percent of GDP. Several countries with significantly larger current-account gaps have experienced less depreciation, and a few developing economies that are running current-account surpluses have seen their currencies slide fairly sharply.