The ongoing squabbles and jockeying over currency rates have escalated to the point where the Royal Bank of Scotland (RBS) has produced a guide for a full-blown currency war, Euromoney reported.
More countries are intervening in the currency market and are hiding behind a “macro prudential” flag of convenience to lend legitimacy to manipulating currencies.
David Petitcolin, global currency strategist at RBS, said, “There cannot, of course, be multiple winners of this game.”
Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.
Competitive devaluation, as it is known among the players, traditionally involves central banks lowering currency rates by buying and selling their own currency and that of other nations, in order to boost exports or to bring down exchange rates.
Some smaller players are actually the most willing and able to intervene, according to RBS’ analysis, including Thailand, Malaysia, Chile and Sweden.
At the other end of the manipulation scale is the United Kingdom and New Zealand, which are among the least willing and able to step into the currency market, according to RBS.
Meanwhile, all eyes are on some of the more active central bank currency players — the Bank of Japan, People’s Bank of China, Central Bank of Brazil and the Swiss National Bank.
With huge monetary stimulus in Europe, Japan and the United States — countries that face weak domestic demand — “global trade tensions have emerged at the forefront of the policymakers' concern from Washington to São Paulo,” Euromoney reported.
CNBC reported earlier this month that the first shots in a global currency war might have already been fired.
Japan set the stage for a potential global currency war, announcing plans to create money and buy bonds as the government of Prime Minister Shinzo Abe looks to stimulate a dormant growth pace, CNBC said.
CNBC said economists are expecting others to follow Japan’s lead, “setting off a battle that would benefit those that get out of the gate quickest but likely hamper the nascent global recovery and the relatively robust stock market.”
The United States itself may be a potential source of volatility if it fails to resolve its lingering fiscal issues, Euromoney reported.
“Demand is waning for longer-dated U.S. bonds, suggesting there is still some concern that the U.S. has not resolved its problems but rather kicked the can down the road,” David Rodríguez, a quantitative strategist at DailyFX, the research arm of FXCM, told Euromoney.
“If we see a loss of faith in dollar-denominated assets, then there is definitely potential for a spike in volatility in the currency.”
“For the quantitative easing-leading Japan and U.S., currency competitiveness is not the lead policy obsession,” RBS said, according to Dow Jones. “Rather, it's a welcome consequence of the need to loosen financial conditions to reflate domestically.”
“This year could see [the] currency fracas morph into something more internationally combustible: a global currency war,” RBS stated.
Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.
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