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.

Singapore dollars
The Singapore dollar is one of the best placed currencies
(Image credit: © Getty Images/iStockphoto)

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

Get 6 issues 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

Sign up

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.


Buying foreign shares is easier than you think – here's how to do it

John Stepek

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.