International Finance and Economy Essay - 1225 Words

The Fed’s decision to start tapering based on the way the US economy is recovering is having an effect on not only US markets but global markets as well. When US interest rates were low, investors were looking for higher returns which they found in emerging markets. As the Fed started tapering, investors started pulling their money out of these emerging markets and putting it back into US markets, which caused emerging market currencies to fall. (De Groote) Contagion is â€Å"the likelihood that significant economic changes in one country will spread to others.† (Contagion) As of now, emerging markets are in trouble. According to Luis Alberto Moreno, the president of the Inter-American Development Bank, â€Å"Emerging markets, especially in Latin†¦show more content†¦Both of these risks can regrettably happen rather rapidly at the same time. Economies with large imbalances that have started to rely on foreign capital are likely to get hit the hardest. The weaker data coming out of China and the taper have â€Å"led to a selloff in some emerging markets such as Brazil, Turkey, Indonesia, and South Africa.† The Brazilian Real, Turkish Lira, Indonesian Rupiah, and South African Rand have all depreciated â€Å"against the U.S. Dollar since Bernanke started discussing tapering on May 22nd 2013.† The last time Brazilian and Indonesian current account deficits surpassed their current level, these countries had cu rrency crises, and they are at levels that haven’t been seen in over ten years. Relative to history the currencies in South Africa and Turkey are substantially weaker than in Brazil and Indonesia so they have much larger holes to fill. (Cohen) These countries have become less attractive to foreign investors because their high levels of inflation lower the real return on investments. To deal with low and declining real returns, Brazil and Indonesia have been raising interest rates since early 2013. South Africa and Turkey have just recently raised interest rates. Turkey used an aggressive approach by increasing 5.5 percentage points, which seems to have worked for them. With South Africa only raisingShow MoreRelatedGlobal Finance Paper1171 Words   |  5 PagesGlobal Finance Paper University of Phoenix Sadaf Asghar, Ryan Crooks, Joseph Martinez, David Trejo, and Anthony Thorton FIN/370: Business Finance Nikita G. Silver January 10, 2010 Global Finance Paper In today’s global marketplace, doing business abroad has become as common as getting dressed each day. Technology has bridged the gap for entrepreneurs and corporate visionaries to expand into global markets with ease. Extensive risk analysis and market research must be communicatedRead MoreThe Canadian Banking System1636 Words   |  7 PagesCanadian banks are generally more diversified, with expansion in wealth management, insurance, deposit and loans, and brokerage services. 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