Currency War and the effect on Exchange Rates

Rates remain above $1.60 against the US Dollar, and still just under €1.14 against the Euro. With little data released yesterday for the UK it was weakness in the US Dollar that caused rate movements yesterday.

For something a little different today, we’ll have a look at the recent talk of a ‘Currency War’ and what this may mean for exchange rates.

Currency War

In recent weeks, there have been warnings over an economic ‘Currency War’ from the International Monetary Fund (IMF) and the United Nations (UN).
So, what exactly is a currency war and what will this mean for exchange rates when purchasing abroad?
In the wake of the global economic crisis, countries want their economy to grow as fast as possible. With low interest rates and spending cuts on the horizon, this leaves an increase in exports as one of the only ways to boost investment into a country. Add Image
Economies are therefore trying to devalue their currency to make exports more attractive, and boost investment.
The problem is that everybody is trying to do the same thing, and we can’t all be net exporters; somebody has to buy and so there will be losers. It’s the national protectionism that’s most worrying. The cohesive strategies employed by central banks in the wake of the credit crunch in 2008 seem to be over and each economic zone is fighting for itself to the detriment of overall global stability.
For those buying in the Eurozone, the problem is that the EU is unable to fight this war effectively due to the same policies affecting each member state differently. Instead, the European Central Bank (ECB) is promoting stability.
This means the Euro is becoming stronger and stronger relative to other currencies and therefore more expensive to buy.
As the IMF said recently, you can’t go down the road of devaluation without a substantial change in exchange rates and that’s why you should worry about where talk of currency wars will lead.
If the world’s leaders cannot agree on the role that currencies will play in this global economy they’re not going to agree on very much else and this means the uncertainty will continue for some time yet.
With the Euro becoming stronger while other currencies are being de-valued, buying rates for the Euro are likely to remain poor for some time to come.

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