Wed, Nov 11, 2015 - Page 15 News List

Currency war hits non-euro nations

COLLATERAL DAMAGE:Central banks of EU nations that are not in part of the euro area had to find ways to hit their policy targets amid monetary easing from Frankfurt


From Stockholm to Prague, Copenhagen and Zurich, officials in European nations circling the currency bloc are waiting for the European Central Bank (ECB) President Mario Draghi to say next month whether he would expand stimulus.

Only then would it be clear whether they would need to retaliate with more asset purchases, rate cuts and currency interventions of their own to dig in against imported disinflation.

The ECB’s bonanza of cheap cash is depressing financial returns in the euro area and driving investment flows into neighboring nations, pushing up their currencies and defeating their efforts to hit their own inflation targets.

Looser monetary policy is in the cards even in nations where economic growth is strong and asset markets are overheating.

“These countries don’t want to be the losers in the currency war they think the ECB is participating in,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd in London. “It’s a zero-sum game. If you’re trying to devalue, then there’s always someone on the other side of that trade.”

After Draghi announced a 1.1 trillion euro (US$1.2 trillion) bond-buying program on Jan. 22, holdings by euro area residents of debt and equity in the nine EU nations outside the currency bloc soared to fresh records, ECB data show. Total portfolio investments rose more than 9 percent in the first quarter to 2.05 trillion euros.

The movement of cash had the effect, not unwelcome at the Frankfurt-based ECB, of helping push the euro down against currencies including the Swedish krona, Poland’s zloty, the Czech koruna and the Hungarian forint. Most dramatically, the Swiss National Bank on Jan. 15 pre-empted the ECB’s decision by abandoning its cap on the franc.

While ECB officials have repeatedly said they do not target the exchange rate, they have acknowledged that a weaker euro helps revive the economy and inflation by boosting exports and pushing up import prices. The single currency has dropped almost 7 percent on a trade-weighted basis this year and since the ECB started considering new stimulus has dropped to the weakest in three months.

The flipside is that nations seeing their currency strengthen face downward pressure on inflation rates already suppressed by falling energy costs. Swedish inflation is at 0.1 percent compared with a target of 2 percent. Denmark is at 0.3 percent and the Czech Republic at 0.2 percent. Consumer prices are declining in Switzerland, Poland and Hungary.

With euro-area prices also stagnating and the ECB considering whether more stimulus is needed, nations that have eased policy this year face having to do so again, even if unwarranted by domestic conditions.

Swiss real-estate prices remain risky, according to a measure by UBS Group AG, yet Swiss National Bank President Thomas Jordan has said the deposit rate could fall further from the current minus-0.75 percent. The central bank is to hold its quarterly policy review on Dec. 10, exactly one week after the ECB’s next meeting.

Swedish property prices have risen almost 50 percent since 2009 and GDP is growing twice as fast as the euro area, yet looser policy might be coming.

Riksbank Deputy Governor Per Jansson said last week that the bank is moving closer to intervening in the currency market.

“The more the ECB does in terms of quantitative easing, the more the Riksbank needs to do in order to avoid the Swedish krona becoming too strong,” said Par Magnusson, an economist at Swedbank AB in Stockholm.

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