Here we go again.
Mario Draghi thought he'd finally won. The boss of the European Central Bank (ECB) had managed to drive through a quantitative easing (QE) programme, much to the chagrin of his German colleagues.
The euro was sliding. Monetary policy was loosening. The eurozone crisis could be contained. Some of the wilder optimists were even suggesting that there might be some sustainable growth!
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And then Janet Yellen went and spoiled it all
When everyone agrees, it's usually time for a change
The US was getting strong again. Employment was rising. Growth had come back. The banks were basically fixed. It wasn't stunning, but nor was it the sort of economic backdrop that could possibly justify a 0% emergency interest rate.
Europe meanwhile well, that was another story.
Mario Draghi, the world's greatest monetary poker player, had finally gone from talking the euro down to pushing through the real thing money printing. With his plans to print €60bn a month to buy eurozone debt, he triggered a major slide in the euro.
Draghi's motives are pretty clear. When Germany was blocking QE (for fear it would let Greece off the reform hook), the only way he had to loosen monetary policy and make life that little bit easier for the struggling eurozone nations was to weaken the currency by any means available.
Then Germany relented, QE started, and everything was hunky dory.
The markets believed that Europe was miles behind the US when it came to monetary policy. The US was set to tighten, while Europe had just set off down the route of money printing. There was no way that anyone was going to bet on the euro strengthening versus the dollar with that happening.
And so the crisis in Europe fell from the headlines, and the euro slid as well. China took over as the big worry du jour, leaving Europe to amble along in its own semi-stagnant way. Even an impromptu Greek election and a Catalan stab at independence couldn't faze the markets.
But that was before Federal Reserve boss Janet Yellen changed the narrative.
Draghi puts his poker face on again
That's a big shift in expectations. It knocks away one big reason to buy the US dollar. And with the economy no longer surprising on the upside, that's another pillar kicked out from underneath the strong dollar story.
So suddenly it's looking pretty forlorn.
Meanwhile, everyone knows that the central bank with the toughest job in the world is the ECB. When the Fed was set to raise rates, everyone just took it for granted that the ECB could print more when it wanted.
But now that the Fed story is being questioned, the ECB one is too. Will printing more money really be that easy? And if it's not, and if conditions in Europe aren't getting any worse, then should the euro really be the obvious short that everyone says it is?
Clearly, Draghi can't let that story take hold. So yesterday, he fired another warning shot in the next battle in the currency wars.
He said: "We are ready to act if needed, we are open to a whole menu of monetary policy instruments". He was pretty explicit too. "The degree of monetary policy accommodation will need to be re-examined at our December policy meeting."
And it worked. For now. The euro weakened yesterday after his speech.
The problem Draghi has now is that markets will test his resolve as is the markets' wont. We've seen this before. Draghi will be saying "I want a weak euro". And the markets will keep saying, "Prove it!" And the euro will likely hang around these levels until he gets more aggressive on the money-printing side. In other words, if he can't push through a bit of shock and awe' come December, the euro's going to bounce right back,
But no one wants a strong currency. So don't be surprised if the Fed carefully calibrates its own dovish talk in response.
When central banks go to war
In the longer run, all this central bank battling is going to cause problems. I still suspect that markets are overestimating the danger from deflation, what with collapsing commodity prices giving consumers a big boost (British consumers have certainly picked up their feet, according to the latest figures on retail sales).
If we have underlying inflationary pressure, combined with central banks madly competing to loosen monetary policy, then that's going to end in a nasty surge in inflation and they'll be entirely behind the curve'. That's why you also want to hold a bit of gold as insurance against monetary upheaval.
Finally, buy cheap markets too not just the ones benefiting from money printing. We've looked at one unusually cheap yet extremely promising market in the latest issue of MoneyWeek magazine it's one I really need to increase my exposure to.
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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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