Thursday September 8, 2022 - 20:09:41 GMT
Global-View.com - www.global-view.com
Share This Story:
|
|
Email
Still a Case for Reverse Currency Wars
I wrote this article in May and it is worth reposting now as the logic of what I expressed then is even more relevant today. However, to change the current direction of the dollar it would probably take coordinated intervention or some other actions by major central banks to reverse its current dominance.
Japanese officials have taken to verbal intervention to stem USDJPY’s surge to 24-year highs. However, history has shown that unilateral action has diminishing results the more times it is employed unless accompanied by other policy actions (i.e. in this case raising interest rates or keeping a lid on JGB yields
The main issue for central banks, which have been frontloading outsized rate hikes, is that further currency depreciation would ease monetary conditions and offset some of the impacts of raising rates.
Whatever the case, logic says the focus of central banks and finance officials should be shifting to ways to stem the depreciation of their currencies or at least restore a two-way risk, an uphill battle given USD strength. This may have been one factor in the ECB decision to hike rates by 75bp as anything less would have seen the EURUSD plummet. .
This is why I say there is still a case for reverse currency wars, the opposite of when rates were low and countries looked to depreciate their currencies to gain a competitive advantage.
The case for Reverse Currency Wars, May 22, 2022
When inflation is low and there was little risk of rising prices, it made little sense for central banks to pursue strong currency policies. Some called it a race to the bottom or a beggar thy neighbor policy as there was little downside to having a weak currency. It was like a “Goldilocks” policy as a weaker currency stimulated exports by making them cheaper while having little impact on inflation as importers were restrained in passing on higher costs. This was often referred to as a currency war,
Well, times have changed. Inflation is on the rise, companies are able to pass on higher costs to consumers due to supply constraints and strong demand, and rising commodity prices are adding to already accelerating price pressures.
All a weaker currency does is increase inflation in an environment where central banks are under pressure to slow respective economies in an effort to get rising prices under control and dampen inflation expectations. In other words, a weak currency only exacerbates the current situation, forcing a central bank to tighten monetary policy even more than otherwise would be the case.
So, what benefit is there to having a weaker currency under these conditions? The answer is very little and for that reason, I would not be surprised to see central banks push back on having a weak currency.
However, I am not suggesting a replay of the 1985 Plaza Accord where major industrialized currencies joined together to push a strong dollar off its perch. Rather, be on guard for any headlines where monetary officials use verbal intervention in an effort to at least slow the dollar’s advance although it would be in their interest to reverse it, a tall task given the Fed’s current monetary stance. Either way, this is what I would call reverse currency wars.
Feel free to contact me with any questions or comments.
If you are struggling to be a profitable trader or are looking to enhance your results, check out 28 Days to Trading Success
Jay Meisler
Co-founder, global-view.com
jay@global-view.com
Forex Trading News
Forex Research
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
here.
Forex News
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."
We are starting an affiliate program to market some of our products.