In early November, the Federal Reserve put all speculation to rest when it formally announced that it would move forward with another found of quantitative easing, as it would inject an additional $600 billion of emergency liquidity into the United States economy. The global response to the Fed’s decision to move forward with QE2 was heated, to say the least. However, let’s first put the Fed’s decision in context. In June, when key data out of the U.S. began missing expectations on a consistent basis, traders began selling the dollar quite aggressively into higher-yielding assets such as emerging market currencies like China, India, Russia, Brazil, and the Eurozone.
When capital flows into an emerging market, it is good until a certain point. However, after a certain point, then increased capital flows actually become destructive. They drive up a country’s currency exchange rate, which causes their exports to become less attractive in foreign markets, which threatens to destabilize economic growth, since most emerging markets are heavily reliant on their exports.
Therefore, the global response to QE2 was frustration. China accused the U.S. of artificially devaluing its currency, Brazil increased a tax on foreign bond holders, and several emerging market Central Banks began intervening in the fx market in an attempt to drive down their exchange rates.
Currently, the United States is not necessarily on the good side of these emerging markets. Even Germany has lashed out at the U.S. regarding its tendency to print money at such substantial levels. Suffice to say, there is much volatility and uncertainty in global forex market, and this volatility will most likely remain in place until the global economy returns to stable growth, and that could be some time yet.
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