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| Economy |
| Expect some currency battles but not a war |
| 2010-10-10 |
| It's not just a crude scramble for recovery that's making currencies central. The steady shift in capital flows towards emerging nations and a reshaping of the global economy to prevent a repeat of the crisis are as key. There are drawbacks to most professions. For those who make a living from the $4 trillion (£2.5 trillion) global foreign-exchange market, the weekend's annual meeting of the World Bank and the International Monetary Fund will have been a reminder of theirs: the need to decipher the often elliptical prognostications of finance ministers, central bankers and assorted policy wonks. A market used to analysing inflation, current accounts and comparative bond yields has spent the past fortnight digesting the increasing talk of a global currency war. The IMF's communqiué made a veiled reference to the rising tensions, saying nations must "detract from policy actions" that would dent a global recovery. Those in the markets are unsurprised that currencies appear to be taking centre stage three years after the financial crisis erupted. Governments have, after all, already yanked very hard on the monetary and fiscal levers to try to ignite growth, particularly in the US, Britain and Europe. "Policymakers will keep debating the use of the exchange rates to maintain growth," said Mansoor Mohi Uddin, who runs currency strategy at UBS, the second-biggest bank in the market. But it's not just a crude scramble for recovery that's making currencies central, experts say. The steady shift in capital flows towards emerging nations such as Brazil and a reshaping of the global economy to prevent a repeat of the crisis are as key. Both US President Barack Obama and the Coalition in Britain have pledged to put exports at the heart of economies that became too reliant on their own indebted consumers. At the same time, capital flows into fast-growing emerging economies are rising, putting upward pressure on their currencies. The Institute for International Finance, for example, forecasts that capital flows into emerging economies will jump to $825bn this year from $581bn in 2009. So, inevitably, the mood has darkened. In the US, the House of Representatives this month passed a bill that would allow tariffs to be imposed on Chinese imports into America. But currency investors are as sceptical of a war breaking out this week. What traders on dealing floors in London - the heart of the foreign-exchange market - are braced for are more central banks trying intervention on their own, and much higher volatility. "It's guerrilla warfare," said Thanos Papasavvas, head of currencies at Investec Asset Management. "The market will be having to listen to what the Bank of Japan says, then the Chinese, then the US." The Bank of Japan shocked markets in September by intervening for the first time since 2004, as it spent 2.1 trillion yen (£16bn) trying to halt the currency's surge against the dollar. But it was only joining the South Koreans and the Israelis, who have already sought to weaken the won and the shekel against the dollar this year. With many now expecting the greenback to slide further as the Federal Reserve embarks on another round of quantitative easing, investors say there is a real risk of tensions escalating. Over the weekend, George Soros, perhaps the world's best-known currency trader, joined the chorus predicting a battle. Papasavvas of Investec says the European Central Bank president, Jean-Claude Trichet, will be alarmed if the euro, already at an eight-month high of $1.39, moves much closer to $1.50. Though currency traders may have had to spend the weekend unpicking the International Monetary Fund's communique, the savvy ones could prove the winners as tensions mount. |
| Posted by:tipper |