How does Fed's decisions impact currency movements?

Q: There is another aspect that has impacted emerging markets like India which is what has happened with currency. There has been so much currency volatility between some of these exchanges, especially for emerging markets and Asian economies. What is the connection between what the Federal Reserve has done and the potential impact as we have seen on currencies such as ours?

A: It does have a role in the exchange rate side that is for sure. There are two things here. First of all, where QE has had a very deleterious impact on emerging markets is in the price of emerging market debt, either sovereign bonds or corporate bonds and this is basically because companies and individuals in the west have been forced into buying companies and sovereign debt in the east and other emerging markets because the yield was attractive. Savers in the west were being offered zero interest rates whereas perhaps in emerging market debt they could get 4-5-6-7-8 percent interest rate; 8 percent at the beginning of the period, 4 percent closer to the end of the period, i.e. the beginning of this year and that of course meant that sovereign debt had become very unattractive and very highly priced. When there is talk about quantitative tapering, QE being tapered back what then happens is that people make an adjustment on their expectations of the ability to buy emerging market debt and on interest rates and that makes them adjust their views of the currencies. Of course that has introduced a degree of volatility, which has been unfortunate for a number of emerging markets including India over the course of this year. However, when you really get down to the emerging market currency moves during 2013, the countries with Current Account Deficits (CAD) have done worst and that is exactly what you would expect. Their external balances were already bad. The countries which have current account surpluses really have not suffered that much at all and again that is exactly what you would expect, but the degree of volatility has been higher than was warranted by economic fundamentals.