Central banks are in combat mode.
On the front lines: Europe, Denmark, Canada, Switzerland, Peru and India. Each of their central banks has taken unprecedented and dramatic action to ease policy and weaken their currencies in the past few days.
Central bankers may say they’re ramping up the fight against worryingly low inflation, exacerbated by the dramatic plunge in oil prices. But the immediate, and perhaps most effective, impact of the easier monetary policy moves is being felt in the foreign exchange market.
“Currency war” was a phrase coined by former Brazilian Finance Minister Guido Mantega in 2010 to complain about developed market central banks, such as the Federal Reserve, weakening their currencies through policies like quantitative easing.
In economics, it was always referred to as “competitive devaluations,” when countries deliberately try to weaken their currencies to boost their country’s exports and economic growth. The currency wars have defined post-financial crisis policies, as countries and central banks search for economic growth that’s been lumpy and disappointing.
The question investors are now asking: How does this all play out?
For the time being, they love it. Easier policy, low rates, QE, cheap money, weak currencies—it’s all a recipe for gains in stocks and bonds, or asKit Juckes, senior forex strategist at Societe Generale, summed up the reaction to the ECB move: “Pretty much unalloyed joy,”
However the worry is, What’s the endgame?
In the 1930s when countries turned to competitive devaluations to boost growth, it backfired. The currency moves exacerbated the Great Depression by increasing trade tensions and barriers, raising business uncertainty and eventually cutting into growth.
“This currency war cannot go well. They never have,” Art Cashin, director of floor operations for UBS at the New York Stock Exchange, told CNBC.
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