Friday, January 23, 2015

ECB currency wars

In this trying time of slow growth and with the deflation demon looming on the horizon, central banks are happy to let their currencies slide to help to alleviate these pressures. We are seeing the currencies of Japan, the UK, Canada, Australia, and now the Eurozone, all fall...but no currency is an island and a currency can only lose value against another currency, that is to say it is impossible for currencies to all lose value at the same time. So which currency is taking the pain and getting stronger against the others? It's the good old greenback, the US dollar.

You could argue that US had its turn after the credit crisis, when the Fed's QE programme led to a slide in the USD. This time around though, it all appears a bit more suspect, especially with the ECB's massive QE programme announced earlier today, which has led to a large drop in the euro, and effectively means that the Eurozone is exporting its deflation problem to the US. this could fast turn into one of those games in which everyone loses.

UPDATE: The last sentence refers to the idea of a zero sum game. More specifically, one expects a continued transfer of wealth from poor to rich i.e. widening inequality, due to the fact that QE inflates financial assets and the housing market by keeping interest rates depressed, and so the asset owning rich will reap outsized gains and the expense of the lesser fortunates.

No comments: