The foreign exchange markets are hanging in the balance today after a mixed bag of economic releases. The recovery has certainly lost momentum in America and this had lead to extra chatter in the markets concerning monetary strategies to give it another kick start.
Nations have issued billions of Dollars worth of additional currency into their banking systems in an effort to re-capitalize them and get them lending again, economists have been watching economic releases very closely but so far the figures from Britain, USA and various European nations have been decidedly lack-luster.
Over the next few weeks both the Bank of England and the Federal reserve in America will be deciding whether extra economic stimulus will be required to kick the global economy back into a growth cycle. Currency speculators expect that the FED will be the first to act, hence the weakness in the Dollar. If the FED acts then we’d expect the BOE to act next. If the past financial crisis is anything to go by then the measures adopted by America then Britain will eventually be adopted by Europe.
I first mentioned a currency war in this column last week after comments made by Brazils Foreign minister, Guido Mantega, finance ministers from the G7 will hold an informal meeting in Washington this week to discuss further concerns that the world is on the brink of a further expansion of this ‘war’ where government’s manipulate their currencies to bolster exports.
The meeting on Friday, on the sidelines of the annual International Monetary Fund gathering, comes amid rising tensions between the western industrialized nations and China, whose prime minister is on a charm offensive in Europe this week.
In two separate moves designed to weaken the Yen the Bank of Japan reinstated its zero interest rate policy and pledged to buy ¥5tn ($60bn) of assets. Brazil has followed suit by doubling a tax on foreign investors buying local bonds to put a lid on a recent rally in its currency. A series of interventions have recently been noted from central banks in Japan, South Korea, Switzerland and Taiwan to make their currencies cheaper.
Britain has seen a recent growth in exports due in part to a weaker pound which has gone some way to help us on the road to recovery. A weaker currency means a country’s exports become more competitive.
Before the IMF meeting, the Institute of International Finance, representing some of the world’s largest banks urged action. In a letter to the IMF, Charles Dallara, the banking lobby group’s big cheese called for greater co-operation; “Urgent action is needed to arrest the disturbing trend towards unilateral moves on macroeconomic, trade and currency issues,” he said.
China is considered to be the main culprit whilst factory output in Britain, the US, Spain, Ireland and Greece all fell back sharply during September, China’s manufacturing output rebounded more quickly than economists had been expecting.
Currency transfer volume has remained subdued so far today, ranges are unlikely to be broken and trends will re-assert themselves throughout. Fundamental data is thin on the ground so traders might well be sitting on their hands until tomorrows European central bank meetings.
