The 2012 Currency Wars

Developing market currencies compared to the US Dollar, YTD, 2012

Developing market currencies compared to the US Dollar, YTD, 2012

With the outset of the 2007 Credit Crunch we saw a massive deflationary wave sweep across most of the developed nations. In response the United States sharply devalued the Dollar by a combination of record low interest rates and Quantitative Easing. The US Dollar fell sharply against other currencies, making US exports cheaper and (so it was hoped) helping to spur the American economy back into recovery.

So now that The American economy seems to be recovering what’s about the US Dollar? The chart above shows the 2012 year to date performance of the US Dollar against a basket of developing market currencies. All of these currencies – with the exception of the Chinese Renmbi – have sharply appreciated, year to date, meaning the US Dollar has weakened. Weaker Dollar, US exports are cheaper, good for Americans, but not so good for developing nations. The American recovery still seems to have been driven by the falling US Dollar so a reasonable question would be – how low can it go?

Brazil, in particular, seems to be most vocal about the problem of America manipulating their currency lower, but most developing nations are being impacted and are looking for alternatives to the collapsing US Dollar.

The US economic recovery? I’m still dubious so is Ben Baranke; most of the “growth” has been driven by a falling Dollar and the largest economy on the planet is driven by consumer spending, in a jobless recovery.

Note: because I don’t have a license to publish currency quotes I’m using ETFs as proxies for the currencies listed above. Expenses will slightly distort the quotes compared to the underlying currencies, but the overall and relative trends reported will be accurate. Specific ETFs are as follows: Brazil (real), China (renmbi), Russia (rouble), India (rupee), Mexico (peso), South Africa (rand)

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