Global financial turmoil has developing nations coping with weaker foreign-exchange rates. This year’s best-performing currencies might prove equally irksome for those central bankers.
The euro and yen are beating all their major counterparts because they are being treated as havens amid the downturn in commodity prices that has sent at least 16 currencies to record lows since the turn of the year. That would not sit well with the European Central Bank (ECB) or the Bank of Japan (BOJ), which both would benefit from weaker currencies to help revive inflation and economic growth.
Worse still, signs are emerging that the currencies are poised to rally further. A narrowing gap between European and US interest rates, plus a growing gulf in the euro versus its effective exchange rate, indicates more gains are in the cards. Hedge funds and large speculators are net bullish on the yen for the first time since 2012. ECB President Mario Draghi might get a first opportunity to push back against the euro’s strength after officials’ monetary-policy decision yesterday.
“The ECB and the BOJ are not going to stand by and watch their currencies strengthen,” said Lee Ferridge, the Boston-based head of macro strategy for North America at State Street Global Markets, a unit of State Street Corp. “If euro-dollar went back toward US$1.15, then you would see some comments coming at least from Draghi and maybe more talk of stimulus.”
State Street has about US$2.2 trillion under management.
The euro and yen have rallied as signs of an economic slowdown in China and a selloff in commodities roil global markets. The MSCI All-Country World Index declined into a bear market and crude oil prices fell to a 12-year low, while Russia’s ruble and Mexico’s peso tumbled to records on Wednesday.
That is raising concern that the outlook for global economic growth is worsening and the US Federal Reserve will have to reduce the amount of policy tightening it expects to deliver this year. Both the euro area and Japan have current-account surpluses, making them attractive venues for capital during times of risk-off sentiment.
The common currency has advanced 0.2 percent against the US dollar this year, while the yen has added 2.5 percent.
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