Currency wars – the new term for protectionism says Schroders

1st February 2013

Fund managers are describing the economic targets of the US and Japan as a 'put option' effectively underwriting share and other asset prices.

But they warn that currency wars are effectively protectionism by another name.

Schroders chief economist Keith Wade says that with the US targeting unemployment and the Bank of Japan committed to ending deflation both point to further asset purchases.

Wade points out the one exception is the European Central Bank which will not be making ‘unsterilised’ purchases in 2013.

Wade says: “There is a “Draghi Put” which originated with the ECB President‘s famous “whatever it takes” speech in London last summer. However, compared to the others, it is well out of the money. As a consequence, foreign exchange markets have drawn the conclusion that the Euro is the most attractive currency and as a result the single currency has been gaining ground.”

Wade points out that there is some disagreement over the strength of the Euro with Jean-Claude Juncker former head of the Eurogroup, a gathering of Eurozone finance ministers – saying the currency was dangerously high, but European Central Bank council member Ewald Nowotny saying he does not share these concerns as the aim of the bank is price stability.

Wade adds: “Mario Draghi observed that the currency is in line with its long run average. There has been greater clarity in Japan where widespread calls for greater currency weakness helped push Japan through 90 against the dollar. At the Davos meetings Japan drew a fair amount of sympathy for its policy, despite the protests of some.”

Wade suggests the UK is also regarded as a ‘winner’ – note the inverted commas – in the currency wars

He says: “Another “winner” in the currency war has been the UK with the GBP falling following remarks by the BoE Governor elect Mark Carney who said there was scope for monetary policy to do more to boost growth. Changes in currency redistribute growth and the rise in the Euro is not good news for the region. The degree to which different countries can cope with a stronger exchange rate depends on the extent to which they compete on quality or price. Countries like Germany are more resilient than those in the periphery such as Italy in this respect. Consequently the rise in the Euro may begin to renew the stress within the Euro region.”

Schroders head of currency Clive Dennis says: The currency wars have been in play in an indirect fashion for some years already via competitive bouts of money printing by developed over-indebted countries and the corresponding foreign exchange reserve build up in emerging markets.

“With little growth momentum and exhausted monetary policy, politicians in the developed markets are getting nervous for their own survival. Fiscal and monetary rules get bent more and more out of shape and beggar thy neighbour policies rise up as the only option left. That gets reflected in trade wars, protectionism and currency devaluation although nobody likes those terms. We now call them currency wars.”


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