Exchange Rate Sensitivity and the Net Foreign Asset Composition

Many currencies, especially from countries with negative net foreign assets, depreciate during financial turbulence. Using a panel of 26 currencies for the period April 2002 to December 2019, I show that the net foreign asset composition is related to the exchange rate sensitivity to global financial market uncertainty changes. Net foreign debt is associated with a higher sensitivity, whereas net equity and FDI are not. Ownership matters too, as this association is stronger for private net liabilities. In emerging markets, this vulnerability arises from net other investments, while G10 currencies are more sensitive the more private net portfolio debt the countries have.