Markets have been gripped in recent weeks by the debate as to whether higher inflation is here to stay, and analysts have suggested the outcome could have significant repercussions for currency markets. The year U. Treasury yield hit a recent high of 1.
While consensus among central bank policymakers remains that higher inflation is transitory , the result of a confluence of surging energy prices and global supply problems, investors have begun to seek protection, with major stock markets snapping multi-month winning streaks in September. The return of a regime of higher and less stable inflation across major economies would cause a spike in exchange rate volatility, and ultimately the depreciation of currencies in countries experiencing the highest inflation prints, according to Jonas Goltermann, senior markets economist at Capital Economics.
The Japanese yen was one of the most volatile currencies between and Because of Japan's policy of near zero-bound interest rates , traders favored the yen for carry trades , in which they borrowed yen for next to nothing and invested in higher yielding overseas assets.
But as the global credit crunch intensified in , the yen began appreciating sharply as panicked investors bought the currency in droves to repay yen-denominated loans. The euro recovered its strength over the next year, but that only proved temporary. Here are some suggestions to benefit from currency moves:. US-based investors who believe the greenback is weakening should invest in strong overseas markets, because your returns will be boosted by foreign currency gains.
For U. The U. Earnings of U. This has admittedly not been a pressing issue since , as U. When that happens, investors who are tempted to borrow in foreign currencies at lower interest rates should remember those who had to scramble to repay borrowed yen in The moral of the story: never borrow in a foreign currency if it is liable to appreciate and you do not understand or cannot hedge the exchange risk.
Adverse currency moves can significantly impact your finances, especially if you have substantial forex exposure. Currency moves can have a wide-ranging impact on a domestic economy and globally as well. When the greenback is weak, investors can take advantage by investing overseas or in U. Because currency moves can be a potent risk when one has a large forex exposure, it may be best to hedge this risk through the many hedging instruments available. Bank of Canada.
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Measure content performance. Develop and improve products. List of Partners vendors. With a potential outbreak of a trade war between China and the US, talks of the Chinese using currency devaluation as a strategy have been rumbling. However, the volatility and risks involved may not make it worth it this time, as China has made recent efforts to stabilize and globalize the Yuan. In the past, the Chinese denied it, but the second largest economy in the world has time and time again been accused of devaluing its currency in order to advantage its own economy, especially by Donald Trump.
The ironic thing is that for many years, the United States government had been pressuring the Chinese to devalue the Yuan, arguing that it gave them an unfair advantage in international trade and kept their prices for capital and labor artificially low.
Ever since world currencies abandoned the gold standard and allowed their exchange rates to float freely against each other, there have been many currency devaluation events that have hurt not only the citizens of the country involved but have also rippled across the globe. If the fallout can be so widespread, why do countries devalue their currency?
It may seem counter-intuitive, but a strong currency is not necessarily in a nation's best interests. A weak domestic currency makes a nation's exports more competitive in global markets, and simultaneously makes imports more expensive. Higher export volumes spur economic growth , while pricey imports also have a similar effect because consumers opt for local alternatives to imported products.
This improvement in the terms of trade generally translates into a lower current account deficit or a greater current account surplus , higher employment, and faster GDP growth. The stimulative monetary policies that usually result in a weak currency also have a positive impact on the nation's capital and housing markets, which in turn boosts domestic consumption through the wealth effect.
It is worth noting that a strategic currency devaluation does not always work, and moreover may lead to a 'currency war' between nations. Competitive devaluation is a specific scenario in which one nation matches an abrupt national currency devaluation with another currency devaluation. In other words, one nation is matched by a currency devaluation of another. This occurs more frequently when both currencies have managed exchange-rate regimes rather than market-determined floating exchange rates.
Even if a currency war does not break out, a country should be wary about the negatives of currency devaluation. Currency devaluation may lower productivity, since imports of capital equipment and machinery may become too expensive. The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Advertisement". The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
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