Quantitative easing (QE) and low interest rates may have staved off depression in the US and Europe but the damaging side-effects are going to be with us for a long time to come. Chief among the victims are emerging markets. At the height of QE , their currencies became rapidly overvalued, as carry traders borrowed in dollars and bought higher-yielding, emerging market bonds. This hit exports and there was talk of a currency war.
Now, as tapering gets under way, markets are moving in the reverse direction much too rapidly. Brazil, Turkey and India have responded by pushing up interest rates to protect falling currencies. According to The Economist's 'Big Mac index' – a currency comparison tool based on the price of burgers – only the Brazilian real remains overvalued, with the Indian rupee now more than 60% undervalued.
