Second, FX markets are very liquid.

Additional expenditures deriving from inflation and currency fluctuations

FX markets have two important advantages in this respect.

Another promising development is the growth of local currency bond markets.

But mortgage markets remain underdeveloped in most emerging economies.

Asymmetries in currency markets are a particularly important aspect of economic power, since they underlie global trade and financial markets. By limiting the convertibility of its currency, China is avoiding currency markets ability to discipline domestic economic decisions.

In recent weeks, Japan became the first large industrial economy to intervene directly in currency markets.

Since then, the Bank of England has eschewed all forms of intervention in the foreign exchange markets.

Likewise, today s euro crisis is harder to resolve because of the euro s strength in currency markets.

Europeans are wrong to be angry with China because its currency peg to the US dollar has boosted the euro against most currencies on foreign exchange markets.

Strong currencies make strong countries, a senior United States policymaker used to say. Many emerging country exporters, struggling to retain customers in the wobbly US and European markets, feel otherwise.

Moreover, some emerging market currencies are joining the club of international currencies for the first time.

So it turns out that in emerging markets, where the fish are, are the emerging middle class of these countries diseases of affluence heart disease, infertility.

They cannot be used to intervene in foreign exchange markets, or in other transactions with market participants.

By limiting the convertibility of its currency, China is avoiding currency markets ability to discipline domestic economic decisions.

As a consequence, the euro is rising not only against the US dollar, but also against Asian currencies, whose central banks intervene in foreign exchange markets to fix their currencies value against the dollar.

Many of the emerging market countries, for example, are still underrepresented.

Finally, local currency bond markets and, more generally, domestic capital markets in emerging economies must be explored further, in order to lengthen the tenure of financial flows.

In many of the troubled emerging economies, however, monetary policy has shouldered the burden of controlling inflation, managing the local currency s value, and supporting growth.

Up to now, the global financial crisis was historically remarkable in having no major impact on foreign exchange markets. The shares of the major reserve currencies were stable, with the dollar accounting for 62 of foreign exchange reserves in 2009 and the euro 27 .

Unlike in the early summer of 2010, it has been largely stable relative to the dollar on foreign exchange markets.

Many emerging economies authorities intervene in currency markets to prevent exchange rate appreciation and a loss of export competitiveness.

Indeed, the threat to withdraw QE is already having an enormous impact on emerging economies asset markets.

Emerging markets currencies also collapsed, even in economies with huge foreign exchange reserves and relatively little debt.

South Korea, Brazil, and other emerging market countries are also attractive diversification investments, causing their currencies to appreciate.

Asymmetries in currency markets are a particularly important aspect of economic power, since they underlie global trade and financial markets.

Many economic and financial analysts complain that emerging countries' stock markets are often heavily manipulated by their governments and are more political than economic.

For each central bank, the question is not what happens to, say, emerging countries as a whole, but what happens to its own currency vis à vis competitors.

Finally, emerging markets need to redouble their efforts to build bond markets, but on a local basis.

Because emerging economies have relatively weak asset markets, their citizens seek safe haven in advanced country government bonds.

Even during the worst of the recent financial crisis, when many markets almost stopped functioning, the FX market carried on relatively normally.

Europeans are wrong to be angry with China because its currency peg to the US dollar has boosted the euro against most currencies on foreign exchange markets. On the contrary, they should view the currency peg as a valuable gift.

Ultimately, even if emerging economies manage to diversify their funding away from foreign currencies, they will remain hostages to US monetary policy cycles.

This will lessen the need felt by emerging economies for self insurance against financial instability, by building up large reserves.

But, whereas we only recently learned that financial behemoths create financial instability, foreign exchange markets for a long time were characterized by volatility and uncertainty.

Of the more than 20 stock markets in Africa, most are undercapitalized they account for some 7 per cent of the capitalization of emerging stock markets and list no more than a handful of companies. Most are ill equipped to handle cross border transactions.

Many emerging country exporters, struggling to retain customers in the wobbly US and European markets, feel otherwise.

The higher interest rates rise to stabilize emerging markets currencies, the more severe their crises will be. Ultimately, even if emerging economies manage to diversify their funding away from foreign currencies, they will remain hostages to US monetary policy cycles.

Exchange of currencies

This description of stock markets in emerging countries is not wrong, just biased, because the same description applies to stock markets in advanced countries.

But, while that implies that emerging market currencies must strengthen, disorderly appreciations would do more harm than good.

Fortunately, Brazil s stock exchange has suffered less than other emerging market bourses from the financial turbulence in the US and elsewhere.

Had emerging economies resisted the temptation of excessive private sector credit growth, raising interest rates in order to stabilize currencies would not pose a severe threat to economic performance.

Having neither the cost and inconvenience of constant currency transactions nor the uncertainty that arises from fluctuations among currencies is a boon to the common currency area.

The answer may be that credit markets are more developed in advanced economies than they are in emerging countries, particularly in terms of the degree to which households are able to borrow.