A further easing of monetary policy by major central banks in recent months, especially by the U.S. Federal Reserve and the Bank of Japan, has not triggered another burst of hot money into emerging markets or raised the value of their currencies as in previous years, according to the Bank for International Settlements (BIS).
The Federal Reserve’s September announcement of unlimited purchases of mortgage-backed securities and its intention to keep rates at close to zero until mid-2015, along with Japan’s expansion of its asset purchases, was greeted with fresh accusations of protectionism and warnings of “currency wars", especially by Brazil’s finance minister.
The phrase was first used in 2010 after the U.S. Federal Reserve embarked on a second round of quantitative easing, which lowered the value of the dollar - which helps U.S. exporters and makes it harder for their competitors - and triggered an inflow of funds in search of higher yields in emerging market economies.
“Yet this time the U.S. dollar appreciated in the three months from the beginning of September, both against a number of individual emerging market currencies and on a trade-weighted basis,” the BIS said in a special feature in its latest quarterly review, adding:“Softer growth prospects in emerging markets partly explain why their currencies and capital flows reacted differently to monetary easing in advance economies.”
Several emerging markets also reacted to the Federal Reserve’s easing by policy measures, with Brazil’s central bank intervening in currency markets, and foreign exchange traders were under the impression that other central banks in Latin American and East Asia were also in the markets.
In Europe, the Czech central bank said it may consider intervening and South Korean authorities investigated banks foreign currency positions and tightened limits on their exposure to currency derivatives.
“All these measures were generally associated with more stable currency values, as evidenced by option implied volatilities,” BIS said.