Are We In A Currency War?

4 Jan

In Japan, the new prime minister, Shinzo Abe, was put into office on a platform that was primarily based upon forcing the Bank of Japan to ramp up its stimulus efforts, indeed to run what amounts to unlimited easing until inflation hits a certain point (2%, in this case).What will happen when Japan kicks in with its own nuclear plans to drive down the yen, and Asia follows suit.

The Swiss and UK central banks are effectively fighting a “low intensity” currency war against each other.

Switzerland is one of the most forthright currency manipulators out there at the moment, as it struggles to hold its franc above 1.20 to the euro. This chart, from the ECB, shows the effect of that fight:

Swiss floor

The Swiss are doing it because a weaker currency, particularly relative to the Eurozone, is good for them – it boosts deficits and interest rates, both things which ought to keep them out of recession.

David Bloom said sterling will wilt soon enough as Britain loses its AAA and graples with its debts. “We have dramatically downgraded our sterling forecast this year to $1.52 on Cable and €0.88 on the euro. The pound is going to come under a lot of pressure.”

It isn’t very different in Europe where eurocrats seem able only to keep the euro crisis from spiraling out of control. In a long newspaper interview, Germany’s Jens Weidmann, president of the Deutsche Bundesbank, said “I find it strange that politicians, who should be leading the way and making the decisions, wish to file in behind us and be guided by us.”

Bernanke has been cajoling, imploring, and warning D.C. about the dangers of inaction all year. He has been adamant about the fact that Fed policy can’t make up for political failures. But with D.C. unable to get past itself, the Fed is filling the vacuum as best it can.

As the world’s most important central bank, the Fed is leading the way on this one, and with Bernanke adopting an essentially unlimited stimulus program, other banks are following. Until the political class, however, gets its act together, it’s hard to see how or why the emphasis on monetary policy will wane.


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