“LONDON (MarketWatch) — Central banks around the world have tried just about everything to drag their economies out of recession. They have slashed interest rates to three-century lows, printed money in vast quantities, and recapitalized banks with soft loans.
So far, however, they haven’t had much success. Now they have one last weapon left in the armory — a currency depreciation.
All-out currency wars are now looming.
A series of central banks, both large and small, have begun to target a lower exchange rate as a way of boosting their economies. Read: The warning from the Bundesbank’s Weidmann about currency wars.
Whether it works remains to be seen. For investors, however, that may be less important than figuring out which countries will be successful in getting their currencies down — and which other assets will go up in value if an all-out currency war does break out.
In the immediate wake of the financial crisis of 2008 and 2009, policy makers agreed not to engage in competitive devaluations.
Beggar-my-neighbor trade polices are part of the textbook explanation for the Great Depression of the 1930s and no one wanted to repeat the mistakes of that decade.
The British managed to slip through a 25% drop in the value of sterling GBPUSD +0.23% without anyone noticing very much (a sign perhaps of the pound’s diminished importance in the world). But otherwise, currencies stayed much were they were before the crisis struck. Indeed, the main feature of the foreign-exchange markets in their last five years has been their extraordinary stability; while every other asset price went haywire, most currencies stayed where they were….”
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