Emerging markets are freaking out about the global flight from risk

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MSCI emerging markets index 6-13-13

Emerging market economies are scurrying to shield themselves from a sell-off in global markets. With their currencies weakening against the dollar as money floods into safe havens, their central banks are taking action.

  • Indonesia‘s central bank unexpectedly raised interest rates today from 5.75% to 6% (paywall). The bank hopes it will help prepare the country’s economy for outflows of foreign cash. It also said it’s ready to buy government bonds to push up the weakening rupiah.
  • India‘s central bank has sold US dollars in the last few days, Bloomberg reports, in an attempt to prevent the rupee from weakening.
  • Thailand has is also selling dollars as the baht weakens. The country’s stock market has plunged in the last few days.
  • Brazil finally scrapped the tariffs on foreign investment it adopted in 2010 to prevent its economy from overheating. Attracting foreign money isn’t as easy as it used to be.

Money has been rushing in and out of emerging markets since the financial crisis. Investors poured in when ultra-easy monetary policy in the US, Europe, and Japan made higher-yielding emerging market investments seem more attractive. Now, as fears of monetary tightening sink in, they’re headed for the exits.

EM currencies ytd 2013