Policymakers from the world's new economic powerhouses in Latin America and Asia pledged on Thursday to come up with fresh measures to curb capital inflows after the U.S. Federal Reserve said it would print billions of dollars to rescue its economy.
Emerging economies expressed displeasure at the Fed's move, making any substantive deal on global imbalances and currencies at next week's Group of 20 meeting in Seoul 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, an advisor 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" on Thursday and would "aggressively" consider controls on capital flows, while Brazil's Foreign Trade Secretary said the Fed's move could cause "retaliatory measures."
Economy Minister Ali Babacan of Turkey, where the central bank has been buying increasing amounts of foreign exchange in an effort to curb appreciation of the lira against the dollar, said the Fed's action might backfire.
"The Fed move was a measure taken in a desperate environment. It should be considered whether pumping this much money into the market can create more damage than benefit," he said.
Thailand raised the possibility of concerted action to combat the flood of investment dollars that are expected to wash 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," Finance Minister Korn Chatikavanij told reporters.
Zeti Akhtar Aziz, head of Malaysia's central bank, also said Asian central banks were "willing to act collectively if the need arises to ensure stability in the region".
A senior Indian finance official, who spoke on condition of anonymity, said that while the United States 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.
G-20 finance ministers last month thrashed out an agreement that papered over the radically different views of the two main belligerents — the United States 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.
The earlier G-20 deal fell short of a firmer statement to allow currencies — in particular the Chinese yuan — to rise, a measure that could have reassured investors that firm policy action was on the agenda, rather than just words.
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," said Credit Suisse currency strategist Olivier Desbarres.
In the wake of the Fed's move to buy $600 billion of U.S. bonds, South Korea's central bank was seen selling its won currency on Thursday 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 $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.
In public, South Korean officials remained optimistic of a meaningful deal from the G-20 but in private, optimism of a pact backed by firm numbers has been tempered by opposition from Germany and China.
"It's very difficult to say that we will have numbers (out of the summit)," said a South Korean official who declined to be named but who had direct knowledge of the talks.
Seoul has held off announcing controls on capital flows for fear of embarrassment ahead of the G-20, but others who will participate have been less shy.
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.
"But it is exactly because the effect is indeed small — a couple of centavos (cents) in the Brazilian real price of one U.S. dollar — both in absolute terms and in relation to the overall fluctuations of the currency, that it does not stand out in the more cursory comparison between the tracking and the actual FX rate," Brazilian investment bank BTG Pactual said in a detailed study of the impact of measures taken.
Colombia announced last week a slew of measures to help counter the rise of its currency, including keeping money abroad, buying dollars in forwards markets and helping industry by cutting import tariffs.
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 $46.4 billion in the year to the fourth week of October compared with $9.4 billion for all of 2009, according to Global fund tracker EPFR.
In South Korea, repeated hints that there will be some form of controls appears to have been shrugged off by investors who bought more Korean bonds in October than at any time in the past year, according to official data released on Wednesday.
In fact Korea appeared to be readying as much for a time when the bubble bursts as for dealing with current inflows.
"When risk appetite goes south and dollar liquidity tightens, you find Korean banks and corporates cannot roll over their foreign exchange debt," said Credit Suisse's Desbarres.
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