There was the belief last year that we were headed to currency wars across countries. More important than the global imbalance story which focuses on flows, there has been a view that currencies, prices, will have to adjust to maintain growth. The currency war view believes that lowering currency values would provide the necessary boost to exports for the growth of many emerging markets and that countries will use their powers to engineer the decline of their currencies. Government forces not market forces will drive currency prices which will impact exports.
The war is not necessary if there is a flight to quality to the dollar. The DXY dollar index has gained 13.5% in the last year. While there has been actions taken to provide better currency rates by emerging markets, the flight to the dollar has been the main driver of currency movements especially with respect to the Euro. In fact, some countries have reversed policies to cur currencies and have been concerned about greater declines. Currency wars may be on hold; however, further EM slowdown may have governments again playing with rates.
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