Currencies Race to the Bottom

Wednesday, 15 May 2013 08:11 AM

By Ashish Advani

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I have been wrong in the past few weeks when I projected significant declines in the U.S. dollar. The turmoil in the currency markets has been acute, with most countries unabashed in their attempts to devalue their currencies. While the U.S. dollar is gaining strength these days, the consequence of the current events does not bode well for the U.S. dollar.

Back during 2008-9 crises, we saw the U.S. dollar skyrocket. This was due to the insane trade in the market called the "risk-off" trade. As the U.S. and world economies collapsed, people ran to the U.S. dollar. Huh?

What happened in the next couple of years was nothing short of opportunistic on the part of the Federal Reserve. As the collapse stopped in March 2009, we saw an amazing swing around in the stock markets, and soon the "risk-on" trade appeared, which was to sell U.S. dollar and buy currencies and assets overseas. For example, the euro, which started at 1.40 before the crisis, plummeted to 1.19 and then soared to 1.60. Currently it trades in the 1.30 to 1.32 range.

What is not well-reported is that during the risk-on trade, the Fed was printing money like crazy and exporting the inflationary trends by allowing cash to flow overseas. As a result, we saw a huge increase in cash overseas leading to very high inflationary prices in India, China, etc. Since the countries were growing rather well, they complained but did not retaliate.

What was expected to be a rescue package in the United States, soon turned into mainstay policy and continues to occur five years after the collapse. The Fed is still printing money, interest rates are at rock bottom and we have yet to see inflation in the United States.

The change this time is that all other central banks have stopped being bullied by the Fed. Most, if not all, central banks have aggressively started lowering their own rates and increasing their own money in circulation.

While no one is calling it a currency war, in reality that is what it is. Each country is trying to devalue its own currency faster than the others are. The response to the devaluation done by the Fed's was muted until last few weeks.

It started in earnest with the Bank of Japan, which announced a massive and super aggressive easing program. Since then, we have seen the Japanese yen plummet from 74 to 101 to the U.S. dollar. (Remember: the higher the number, the cheaper the yen.)

Soon most banks jumped into the act. Australia, China, India, Sweden, New Zealand, South Korea, Thailand, Sri Lanka and the European Central Bank — the list is endless. They have all jumped in and started cutting rates and starting printing more money — this time without any pretenses or excuses.

While no one is calling it debasement of their currency, they all echo the same excuse — growth is slowing and inflation is at historic lows.

In this race to the bottom due to the competitive devaluations, we have not seen the U.S. dollar decline despite having some of the worst economic fundamentals. This is simply because the others are forcing their own currencies lower faster than the U.S. dollar.

Get out from the U.S. dollar while you can, because when this tide turns, it will get very ugly for the U.S. dollar.

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