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Rising US interest rates cause market, currency trouble in other nations

By Jim Randle | VOA | Additional editing by Inside Costa Rica staff.

February 1, 2014 (VOA) The Federal Reserve gave the improving U.S. economy a vote of confidence this past week, saying it no longer needs as much stimulus to keep growing.  The Fed’s actions will raise key U.S. interest rates, but some economists say it has caused a drop in stock and currency values in some emerging markets – including perhaps, Costa Rica, where the colon dropped to its lowest value in two years during a single day on Wednesday.  

The U.S. central bank has cut back economic stimulus efforts, which will push some U.S. interest rates higher.

The change prompted investors to move money from emerging markets to the United States in search of better returns, contributing to some stock and currency market turmoil.

William Cline, a scholar at the Peterson Institute for International Economics, says the worst is probably over.

“Markets tend to front-load [quickly make] the adjustment [to rising U.S. interest rates] anticipating what is going to happen down the road.  Much of the impact of higher U.S. interest rates, I think we have already seen,” said Cline.

Years of U.S. low interest rate policies encouraged investors to put money in emerging markets where relatively higher interest rates gave them bigger returns.

Demand from foreign buyers propped up stock prices and currency values in those nations.

Adelphi University professor and Wall Street veteran Michael Driscoll says rising U.S. interest rates changed that.

“If rates in the U.S. do start to climb up a little bit, some of this liquidity and capital will come back to the United States to take advantage of capturing these higher rates, and exit these emerging markets around the world,” said Driscoll.

Boston University professor and former Fed official Cornelius Hurley says emerging nations are taking action to offer investors a better return in the hope of slowing the flight of capital.

“[They are] contemplating raising interest rates to protect their own currencies.  Well, that slows down their economic activity,” said Hurley.

While raising emerging market interest rates attracts investors, it could slow economic growth by making it more expensive to borrow the money needed to buy homes or build factories.

Peterson scholar William Cline thinks there will not be a major cut to emerging market growth.

“The emerging markets will turn in an acceptable moderate year of growth now,” said Cline.

Growth in emerging markets will make it easier for U.S. companies to sell goods and services abroad.

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