Tuesday May 10, 2022 - 14:56:14 GMT
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A Case for Reverse Currency Wars
When inflation is low and there was little risk of rising prices, it made little sense for central banks to pursue strong currency policies. Some called it a race to the bottom or a beggar thy neighbor policy as there was little downside to having a weak currency. It was like a “Goldilocks” policy as a weaker currency stimulated exports by making them cheaper while having little impact on inflation as importers were restrained in passing on higher costs. This was often referred to as a currency war,
Well, times have changed. Inflation is on the rise, companies are able to pass on higher costs to consumers due to supply constraints and strong demand, and rising commodity prices are adding to already accelerating price pressures.
All a weaker currency does is increase inflation in an environment where central banks are under pressure to slow respective economies in an effort to get rising prices under control and dampen inflation expectations. In other words, a weak currency only exacerbates the current situation, forcing a central bank to tighten monetary policy even more than otherwise would be the case.
So, what benefit is there to having a weaker currency under these conditions? The answer is very little and for that reason, I would not be surprised to see central banks push back on having a weak currency.
However, I am not suggesting a replay of the 1985 Plaza Accord where major industrialized currencies joined together to push a strong dollar off its perch. Rather, be on guard for any headlines where monetary officials use verbal intervention in an effort to at least slow the dollar’s advance although it would be in their interest to reverse it, a tall task given the Fed’s current monetary stance. Either way, this is what I would call reverse currency wars.
Feel free to contact me with any questions or comments.
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