The return of the currency wars
The post-2008 currency wars were all about the race to the bottom. The post-Covid world is very different, says John Stepek.
Talk of “currency wars” became popular in the wake of the 2008 financial crisis. During that period, when demand was extremely weak and central banks desperate to avoid deflation, it seemed that every country with the ability to do so was trying to devalue its money so as to boost exports and steal growth in a “beggar-thy-neighbour” race to the bottom.
We’re now in a very different environment, says Vincent Deluard of financial services group StoneX. While the 2008 financial crisis destroyed demand (everyone had too much debt) while maintaining supply, which was deflationary, the Covid-19 pandemic and ensuing lockdowns destroyed supply (businesses were shut and supply chains halted), while maintaining demand (as governments paid wages).
This has proved inflationary, which demands the opposite approach to that seen after 2008. Given that economies are at full capacity, the only way to boost supply without raising inflation is to import – “strong currencies are needed to lower commodity bills and steal trade partners’ output”, says Deluard. In short, “the winners of the currency wars of the 2020s will be the currencies which can rise the fastest”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The six winning currencies
Currency exposure is not the most important factor to worry about when considering where to put your money. However, it might help to guide you as to where to allocate the overseas chunk of your equity portfolio – or give you some ideas as to which currencies to hold in the cash portion of your portfolio. So which are best placed to win? Deluard lands on six: the Australian, Singaporean and Canadian dollars, plus the Swiss franc, the Norwegian krone and the Chilean peso.
Sharp-eyed readers will note that four are commodity currencies: Norway and Canada are oil plays, while Australia and Chile export lots of key metals. Meanwhile both Norway and Switzerland have vast reserves: “Every Norwegian and Swiss owns $243,000 and $128,000, respectively, in foreign assets,” notes Deluard.
Singapore’s dependence on commodity imports is a weak spot but it has a healthy national balance sheet (with net debt of zero and a triple-A credit rating) and a strong track record of controlling inflation. Note also that the Singaporean market as a whole looks relatively inexpensive right now, particularly as Singapore re-opens post-pandemic.
If you’re investing in overseas shares be aware that foreign exchange is one of the few areas where brokers and banks can still get away with charging ridiculously high fees in the form of rip-off exchange rates, so do double-check what you’re being charged on that front.
SEE ALSO:
Buying foreign shares is easier than you think – here's how to do it
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He 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.
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.
-
How have investment markets responded to the Autumn Budget?
Markets were calm while Reeves delivered her Budget speech, but turned sour in the aftermath as investors digested the full implications of her fiscal plans
By Katie Williams Published
-
4 money moves to make post Budget
Capital gains tax has increased and inheritance tax perks are being reduced – here is how to bypass the Budget tax rises
By Marc Shoffman Published
-
How Finseta is cashing in on currencies
Finseta has established a foothold in the upper echelons of the market for international payments. Should you invest?
By Dr Mike Tubbs Published
-
Is the US dollar losing its appeal?
The US dollar is looking oversold in the short term and is due a bounce. What does it mean for global markets and the upcoming US elections?
By Dominic Frisby Published
-
What does a weak yen mean for Japan's economy?
The Japanese yen slumped to a 34-year low. What does a weak yen mean for inflation, interest rates and tourism in Japan?
By Alex Rankine Published
-
Why you should keep an eye on the US dollar, the most important price in the world
Advice The US dollar is the most important asset in the world, dictating the prices of vital commodities. Where it goes next will determine the outlook for the global economy says Dominic Frisby.
By Dominic Frisby Published
-
Sterling accelerates its recovery after chancellor’s U-turn on taxes
News The pound has recovered after Kwasi Kwarteng U-turned on abolishing the top rate of income tax. Saloni Sardana explains what's going on..
By Saloni Sardana Published
-
Will Liz Truss as PM mark a turning point for the pound?
Analysis The pound is at its lowest since 1985. But a new government often markets a turning point, says Dominic Frisby. Here, he looks at where sterling might go from here.
By Dominic Frisby Published
-
Are we heading for a sterling crisis?
News The pound sliding against the dollar and the euro is symbolic of the UK's economic weakness and a sign that overseas investors losing confidence in the country.
By Alex Rankine Published
-
The US dollar is rising to dangerous levels – here’s what to do about it
Analysis The US dollar is back on the rise as panicky investors head for safety. That’s rattling markets across the world, says Dominic Frisby. Here’s how to cope.
By Dominic Frisby Published