In this deep economic crisis, everyone wants a weak currency. Europe’s export-oriented economy is suffering from a strong currency, especially after the moves from Switzerland and from America. Will they stay on the sidelines or intervene?
The Japanese economy is export based, and has significantly suffered from the global economic crisis. A strong currency is very bad for the Japanese economy. The strong Yen has been reflected in Japanese companies’ reports.
When USD/JPY reached 87, the BOJ and the Japanese government were quite frightened, yet they refrained from intervening in the forex market. Lucky for them, the Yen has depreciated since then, allowing the Japanese policymakers to breath…
Contrary to Japan, Switzerland didn’t stay on the sidelines: they saw how the relatively strong Swiss Franc is hurting their economy and made a bold move: they began dropping Francs in the open market, causing a sharp fall in the value of the CHF.
The SNB’s move was described as the start of a global “forex war“. In this article by Kathy Lien, she describes the Swiss move as a break of the unspoken truce not to intervene in the markets.
This week’s stunning announcement by the FOMC sent the dollar down. They’re actually spilling 1 trillion dollars ($1,000,000,000,000) into the market. This money printing by the Federal Reserve devalues the dollar, similar to Obama’s stimulus package.
This huge move from the FOMC affected all the currencies, but had a stronger impact against the Euro. EUR/USD broke many resistance levels and stopped to rest only at 1.3730, about 600 pips higher than before the announcement, and about 1000 pips higher than it traded in the past few weeks.
European policy makers have all the reasons to be worried: growing unemployment in the Euro zone, strikes in France, and the fear that Eastern European countries will go bankrupt, loom over the old continent.
Now, with a stronger currency, exports from Europe are less attractive, less competitive. Scary for Europe!
Jean-Claude Trichet and his fellows have acted slowly on this crisis: they lowered interest rates rather slowly, and even showed optimism. A higher currency should wipe the smile of his face.
With the Swiss and American moves and the deteriorating economy, the ECB could join the forex war. Devaluing their currency will sure help Europe.
On the other hand, the ECB’s cautious behavior until now and the slow European mentality could make them refrain from such moves.
What will Jean-Claude Trichet do?