Emerging market slump highlights Fed's global reach

Sun Aug 25, 2013 1:14pm EDT
 
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By Pedro Nicolaci da Costa

JACKSON HOLE, Wyoming (Reuters) - The recent selloff in emerging markets is a classic case of being careful what you wish for.

When the Federal Reserve was ramping up its asset purchases to support a flagging U.S. economy, many officials overseas criticized the United States for putting undue upward pressure on their currencies. Most memorably, Brazilian Finance Minister Guido Mantega suggested rich countries were engaged in a "currency war" or a race to devalue to gain a trade advantage.

Now that the Fed is moving toward shuttering its bond-buying program, currencies in emerging markets have begun to plunge and there are growing fears of a possible crisis.

The Indian rupee and Turkish lira have sunk to record lows against the dollar, while the Indonesian rupiah has hit a four-year low. Mexico and Korea have faced pressure, as has Brazil, which last week put up $60 billion to stem the real's slide.

The risk of these pressures snowballing into a crisis that engulfs the world economy was the focus of much of this year's Federal Reserve conference at Jackson Hole, whose theme was the global dimensions of monetary policy.

Central bankers from around the world attended the conference, which wrapped up on Saturday, and their conclusion was not startling: unconventional monetary policy in developed nations such as the United States, while appropriate for domestic objectives, can have big spillover effects.

And, for better or worse, these policies - such as the Fed's bond buying and near-zero interest rates - have spurred the need for developing countries to create their own unconventional tools to control monetary flows.

But there was disagreement as to the degree central bankers in rich nations should pay attention to the overseas impact of their policies, as opposed to simply focusing on the economic goals of their home country, as has been traditionally the case.   Continued...

 
The Federal Reserve building is seen in Washington June 19, 2012. REUTERS/Yuri Gripas