Weekly Commentary - Currency War
The term “Currency War” is the most popular topic in the investment world recently. This term was coined by Brazil’s finance minister in 2010 in response to the QE from U.S. Federal Reserve pushed up currencies in other countries. In 2013, the focus turned to Japanese Yen, which depreciated by around 15 percent against U.S. Dollar over last 3 months. In the latest meeting of G20 nations over the weekend, the Group declared there would be no currency war and Japan escaped the blame from other countries.
However, the potential of competitive devaluation of currencies cannot be ruled out. Japan can escape the blame from G20 is because there is no real action taken by Bank of Japan or Japanese Government so far. Depreciation of Yen is mainly because investors believe the Bank of Japan will create more money to achieve the inflation target in the near future. French President Francois Hollande already called for a more managed exchange rate in the previous week, and G7 nations, which include Germany, U.S. and Japan, also warned about the effects of volatile movements in exchange rate. European countries can tolerate a strong Euro as they expect they will see a moderate recovery in 2013. However, if the depreciation of Yen hurt the economic recovery in Europe, ECB can cut its interest rate to stimulate regional economic and weakened the currency. The wording from G20 nations can be broke silently.
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