Fed taper presses on emerging markets

Markets soured, the dollar climbed and vulnerable emerging markets came under pressure the day

after the US Federal Reserve started to pare back its asset purchases to $75bn a month.

The taper heralded a new era of dollar strength, with the US currency up by 0.6 per cent against a

basket of rivals. Treasury yields rose and the Brazilian real and Turkish lira sold off.

The market movements could mark trouble ahead for both the Fed and emerging markets, with a

stronger currency dragging on US growth, and the renewed risk of capital outflows from weaker

economies as tapering continues in 2014.

“Emerging market foreign exchange does not like the idea of Fed tapering,” said Marc Chandler, head

of currency strategy at Brown Brothers Harriman. Despite expectations that global investors had

already reallocated their portfolios since the prospect of a taper was floated in May, “price action

suggests otherwise”, he said.

When US interest rates were low and falling, large amounts of capital flowed to emerging markets in

search of higher returns, but as the US recovers that process could reverse.

Ben Bernanke, Fed chairman, suggested that the Fed’s default plan is to taper by $10bn per meeting

if the economy keeps getting better, giving markets confidence that US policy has reached a turning

point.

The Brazilian real dropped 1.2 per cent, while the Korean Won slipped 0.9 per cent and the Turkish

lira neared an all-time low against the dollar.

The yield on 10-year US Treasuries rose to 2.95 per cent, just shy of its 3 per cent peak earlier this

year.