And so the currency wars …

USD, Yen & Pound Sterling, YTD, 2013

Last month’s G20 finance ministers meeting in Moscow ended with the proclamation they would “refrain from competitive devaluation”. Well, someone should tell the left hand what the right hand is up to. The chart above details the Yen index ($XJY, black line) and Pound index ($XBP, blue line) compared to the US Dollar index (the green area chart) and clearly the currency wars are raging, with year to date returns on the Yen at -7.31%, the Pound at -7.52% (driven, no doubt, by the recent Moody’s downgrade). While these currencies decline at the same time the US dollar index has been surging, up 3.19%.

So what’s going on? As economies slow a weaker currency will result in cheaper exports so all good, right? Not really. A cheaper currency renders imports more expensive, thus driving inflation. Also what’s called the “beggar thy neighbour” phenomenon means that as one nation weakens their currency, others, in particular trading partners, must do the same. The Chinese are ready for currency war, but is America ready for strong US $?

This policy of strong dollar can’t continue forever. The dollar strength doesn’t reflect the performance of the US economy. That US dollar is looking unnaturally strong to me …

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