Global Currency War: A Realistic Prospect for 2013?
"Currency Wars".
I can't tell you how many times I've heard that term being used on Bloomberg and CNBC in the past month.
A currency war, simply put, is where central banks take steps to intentionally devalue their currency and gain a cost advantage in promoting exports.
So, how likely is a currency war? What effects would it have on the global economy in 2013? Firstly, it is important to distinguish between currencies where active government intervention is resulting in devaluation, and those currencies which have been weakening due to economic fundamentals.
Since the beginning of 2013, the GBP in particular has taken quite a hit against other major currencies such as the EUR and USD.
Weak GDP of -0.
3% in 2012, continuing unemployment and increases in inflation expectations to 2.
7% for the month of January are all drivers behind the weakening GBP.
Uncertainty regarding the UK's potential distancing from the Eurozone has also caused a loss of confidence in the currency.
Clearly, investors do not see the GBP as being the safe haven it once was.
Contrast this to Japan, where up until the end of 2011 the JPY was at a record high against the USD and the Central Bank could not devalue it quickly enough.
Now, as a result of government intervention we have seen the JPY weaken by over 14% against the US Dollar in the past year.
In addition, prospects for the EUR apparently do not look favourable moving forward.
Aside from the increasing resistance from Greece on the budget limits imposed on them by the EU, stronger economies such as Germany need to revitalise their export market.
Devaluing the EUR seems to be the only weapon left.
Indeed, there is increasing discontent even among core economies in the Eurozone, namely France and Germany, who do not wish to be burdened with funding the debt of peripheral members.
Economic growth is becoming a priority, and it would not be surprising if a strong EUR becomes a lower priority for the European Central Bank this year.
While I want to clarify that I'm not in the business of offering investment advice, it would seem that the US Dollar is set to remain a safe haven among investors this year.
Despite recent concerns over the fiscal cliff, other nations such as Europe and Japan cannot exactly claim to be debt-free.
We now seem to be entering a situation where countries that are not as competitive may devalue their currency to bolster exports.
However, given the potential impact of inflation on exports, a currency war would not be in any nation's interest.
Let's hope that panic doesn't spread and countries come up with other means to bolster their competitiveness.
As Thomas Edison famously quoted, "When you have exhausted all possibilities, remember this - you haven't.
"
I can't tell you how many times I've heard that term being used on Bloomberg and CNBC in the past month.
A currency war, simply put, is where central banks take steps to intentionally devalue their currency and gain a cost advantage in promoting exports.
So, how likely is a currency war? What effects would it have on the global economy in 2013? Firstly, it is important to distinguish between currencies where active government intervention is resulting in devaluation, and those currencies which have been weakening due to economic fundamentals.
Since the beginning of 2013, the GBP in particular has taken quite a hit against other major currencies such as the EUR and USD.
Weak GDP of -0.
3% in 2012, continuing unemployment and increases in inflation expectations to 2.
7% for the month of January are all drivers behind the weakening GBP.
Uncertainty regarding the UK's potential distancing from the Eurozone has also caused a loss of confidence in the currency.
Clearly, investors do not see the GBP as being the safe haven it once was.
Contrast this to Japan, where up until the end of 2011 the JPY was at a record high against the USD and the Central Bank could not devalue it quickly enough.
Now, as a result of government intervention we have seen the JPY weaken by over 14% against the US Dollar in the past year.
In addition, prospects for the EUR apparently do not look favourable moving forward.
Aside from the increasing resistance from Greece on the budget limits imposed on them by the EU, stronger economies such as Germany need to revitalise their export market.
Devaluing the EUR seems to be the only weapon left.
Indeed, there is increasing discontent even among core economies in the Eurozone, namely France and Germany, who do not wish to be burdened with funding the debt of peripheral members.
Economic growth is becoming a priority, and it would not be surprising if a strong EUR becomes a lower priority for the European Central Bank this year.
While I want to clarify that I'm not in the business of offering investment advice, it would seem that the US Dollar is set to remain a safe haven among investors this year.
Despite recent concerns over the fiscal cliff, other nations such as Europe and Japan cannot exactly claim to be debt-free.
We now seem to be entering a situation where countries that are not as competitive may devalue their currency to bolster exports.
However, given the potential impact of inflation on exports, a currency war would not be in any nation's interest.
Let's hope that panic doesn't spread and countries come up with other means to bolster their competitiveness.
As Thomas Edison famously quoted, "When you have exhausted all possibilities, remember this - you haven't.
"