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Emerging market turbulence could make for stormy G-20 meet

TOKYO -- When finance ministers and central bank governors from the Group of 20 major economies meet in Sydney on Feb. 22-23, their focus will be the ongoing money market turmoil in emerging countries.

     Some members, including India and South Africa, have expressed their unhappiness with the scaling back of quantitative easing in the U.S., which has triggered an outflow of money from emerging countries. The discussions could become heated.

     The gathering will mark Janet Yellen's international debut as chair of the U.S. Federal Reserve. Market participants have been closely watching her remarks. Last Tuesday, the new Fed chief touched on concerns about emerging-market currencies in her first congressional testimony. "At this stage these developments do not pose a substantial risk to the U.S. economic outlook," said Yellen. Her words were of massive interest to market players because the remarks came after emerging-economy currencies tumbled following a plunge in Argentine peso.

Sense of frustration     

The Fed decided to continue its tapering moves at a two-day meeting of the Federal Open Market Committee that ended on Jan. 29. Yellen's remarks have instilled a sense among some emerging economies that the U.S. places priority on its own monetary policy and is distancing itself from their currency woes.

     "International monetary cooperation has broken down," said a frustrated Raghuram Rajan, governor of the Reserve Bank of India, in a televised interview on Jan. 30.

     When the U.S. began the tapering move, South African Reserve Bank Gov. Gill Marcus released a statement saying, "emerging markets have subsequently experienced a high degree of turbulence." Sensing a possible crisis, the bank decided to raise its policy rate for the first time in five and a half years.

     Countries whose currencies have been driven lower by America's scaling back of its monetary easing program -- India, South Africa, Turkey, Brazil and Indonesia -- have been dubbed the "Fragile Five." All are G-20 members.

     G-20 finance ministers and central bankers meet about four times a year. Some observers expect Yellen to come under harsh criticism from emerging-market officials in Australia.     

     The joint statement to be released after the meeting will be the focus of intense scrutiny by players in the foreign exchange and stock markets. Ever since the possibility emerged last year that the Fed may scale back its quantitative easing program, the impact of such a move on emerging markets has been a topic of repeated discussion at G-20 meetings. At the gathering in Washington in October last year, the communique included the message, "We will ensure that future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated" with a possible tapering of the U.S. quantitative easing in mind.

Waiting for the word     

Now that tapering moves have actually begun, how the financial leaders will adjust the wording at the upcoming meeting will be the main point of interest for many. According to Kengo Suzuki, chief currency strategist at Japanese brokerage Mizuho Securities, buybacks of emerging-market currencies will further weaken the yen if the statement by financial leaders includes hopeful messages regarding emerging countries.

     Osamu Takashima, chief foreign exchange strategist at Citigroup Global Markets Japan, said also of key importance will be discussions on monetary policy cooperation among the Fed, the European Central Bank, the Bank of Japan and other major central banks. Because the U.S. has begun scaling back its quantitative easing, worries over emerging economies may diminish if other industrialized nations take further easing steps. Already, speculation is growing that the ECB will introduce additional easing steps. If the joint statement contains wording suggesting such cooperation, trading incentives will likely be created.

     On the other hand, the situation could worsen if there are strong disagreements between industrialized economies, including the U.S., and emerging countries.

     "Such a scenario could throw cold water again on the global financial market," said Norihiro Fujito at Mitsubishi UFJ Morgan Stanley Securities. 

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