Tue, Jul 16, 2019 - Page 10 News List

Currency war can no longer be ruled out: PIMCO

ESCALATION RISK:The war may not be restricted to major central banks, as rate drops are forecast in nations such as South Korea, the firm’s global economic adviser warned

Bloomberg

A full-blown currency war where major central banks and governments, including the US, deliberately weaken their currencies can no longer be ruled out, Pacific Investment Management Co’s (PIMCO) global economic adviser Joachim Fels wrote in a report.

The view is in line with a rising chorus of Wall Street analysts who warn that US President Donald Trump’s repeated complaints about the foreign-exchange practices of key trading partners heightens the risk of US intervention to weaken the US dollar.

Fels described current conditions as a “cold currency war, round three” that is at risk of escalating.

“Following a pause since early 2018, the cold currency war that has been waging between the world’s major trading blocs for more than five years has been flaring up again,” Fels wrote.

“Moreover, even an escalation to a full-blown currency war with direct intervention by the US and other major governments/central banks to weaken their currencies, while not a near-term probability, can no longer be ruled out,” he said.

Trump’s calls for the US Federal Reserve to cut interest rates, as well as signals from the European Central Bank, the People’s Bank of China and the Bank of Japan that hint at further easing measures, has inflamed global currency tensions, Fels said.

“The curtain has opened for round three of the cold currency war,” he said.

While near-term intervention by the US government to weaken the US dollar remains unlikely — given unresolved questions such as whether the US Department of the Treasury has adequate firepower — the greenback could still be weakened by policy signals.

“Even the threat of outright dollar sales, coupled with continued verbal and tweeted ‘weak dollar policy’ interventions and, importantly, easier monetary policy by the Fed, could well do the trick,” Fels said.

The US last intervened in foreign-exchange markets in 2011 when it stepped in along with international peers after the yen soared in the wake of that year’s devastating earthquake in Japan.

Major central banks might not be the only ones in the cold currency war, said Fels, adding that there are expectations of lower rates in South Korea, Indonesia, Chile and South Africa this week.

“While I’ve focused on the cold currency war among major central banks in this note, many other central banks are of course also engaged in it,” Fels wrote.

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