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Currency Wars

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Currency Wars! What are they? Who’s fighting and what are they fighting about ? How does it affect us?

Currency Wars’ simply refers to the situation where a number of countries are effectively competing to devalue their currencies. They are doing this to ‘cheapen’ their currency in order to either export their way out of recession or boost their local tourism industry to improve their domestic economic situation.

It sounds simple however there are a number of economic and political consequences, hence the reference to a ‘War’!

As one country’s exchange rate devalues, then so also does the cost of imports. It can also upset a country’s major trading partners who may feel that the country with a devalued currency is competing with an unfair advantage and not in the spirit of global free trade!

The situation we have at present is certainly a global economic rarity and only really held in comparison to the events that occurred back in the 1930s and the Great Depression. Hence you can understand the need for extreme action.

After the relatively prolonged period of sustained global growth came crashing down in 2007, led by the collapse of a number of US investment banks such as Lehman Brothers, and the entire global financial system was on the brink of disaster, the US Federal Reserve had to take such drastic action.  The gloves were off and it was every Central Bank for themselves !! They cut rates to zero, bailed out the banks by offering cheap guaranteed funding, introduced QE ( Quantitative Easing – printing money and flooding the market with cheap cash, effectively lowering market interest rates) and drove the USD lower against every traded currency across the world.  Smart move!

By the time the rest of the world realised what was happening and they were enjoying the benefits of a strong currency, they were hooked on cheap US funding and a high exchange rate was adding to their own domestic economic situation.  For many countries this has taken a number of years to filter through. In mid -2014  we saw the BOJ take unexpected action and introduce QE, followed by a number of countries.  Sweden, Sth Korea, Switzerland, the ECB, Russia, China and of course Australia have all been cutting their respective interest rates.

Australia has been relatively immune to the global slow-down due to the strength of our substantial commodities exports which have somewhat distorted our economic landscape, as well as our booming property sector. Only a few years ago the Australian dollar was trading at $1.10.  Commodity prices have now corrected as has the AUD. The question now is, when will property prices ??!!

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