Policymakers from the world’s new economic powerhouses in Latin America and Asia yesterday pledged to come up with fresh measures to curb capital inflows after the US Federal Reserve said it would print billions of dollars to rescue the economy.
Emerging economies expressed displeasure at the Fed’s move, making any substantive deal on global imbalances and currencies at next week’s G20 meeting that Seoul is hosting even less likely.
“As long as the world exercises no restraint in issuing global currencies such as the dollar — and this is not easy — then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin (夏斌), an adviser to China’s central bank, wrote in a newspaper managed by the bank.
South Korea’s Ministry of Finance and Strategy said it had sent “a message to the markets” yesterday and would “aggressively” consider controls on capital flows, while Brazil’s Foreign Trade Secretary said the Fed’s move could cause “retaliatory measures.”
Thailand raised the possibility of concerted action to combat the flood of investment dollars that are expected to wash into into emerging markets.
“The central bank governor has confirmed discussions with central banks of neighboring countries, which are ready to impose measures together if needed to curb possible speculative money flowing into the region,” Thai Finance Minister Korn Chatikavanij told reporters.
A senior Indian finance official, who spoke on condition of anonymity, said that while the US had a right to stimulate its own economy, others would also serve their own interests and said that any deal on currencies in Seoul had to be a “win for both the blocs.”
“And that begs a political solution and that’s why we are all looking to Seoul,” he said.
G20 finance ministers last month thrashed out an agreement that papered over the radically different views of the two main belligerents — the US and China — in a statement that called for competitive currency devaluations to be avoided and for governments to work towards a full suite of policies to reduce current account imbalances.
China’s Xia bluntly warned in the Chinese language Financial News that Beijing would pursue its own interests, saying: “We must think ‘what is good for us.’”
“It doesn’t seem to me that this is the kind of environment in which any country will commit to targets,” Credit Suisse currency strategist Olivier Desbarres said.
In the wake of the Fed’s move to buy US$600 billion of US bonds, South Korea’s central bank was seen selling its won currency yesterday in a bid to cap gains after it hit six-month highs in the run-up to the Fed announcement.
Other high-yielding currencies also rose, with the Australian dollar breaking through US$1 to its highest levels since 1982 and Japan warned that it was ready again to use intervention to halt a rising yen that would hurt its huge exporters.
Brazil has announced a slew of measures over the past few weeks to curb the appreciation of the real currency by direct intervention in markets and doubling a tax on portfolio inflows, although the measures do not seem to have had much of an impact.
The Hong Kong dollar fell to near the bottom of its band on Wednesday on repeated speculation in financial markets that it would have to adjust its dollar peg to staunch inflows.
Inflows have been massive. Flows into emerging market funds are US$46.4 billion in the year to the fourth week of October, compared with US$9.4 billion for all of last year, according to Global fund tracker EPFR.
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