Emerging market slump highlights Fed's global reach

Sun Aug 25, 2013 1:03pm EDT
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* Currencies plunge as Fed gets ready to trim bond buys

* Risk of crisis takes center stage at Jackson Hole

* Fed mindful of spillovers, but focus is on U.S. economy

* Emerging markets urged to erect their own defenses

By Pedro Nicolaci da Costa

JACKSON HOLE, Wyo., Aug 25 (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.   Continued...