Jockeying for the Weakest Currency

Last week in my article Trouble by the Pound, I focused on the idea that given the double-dip recession Britain is already in, and the strong pound relative to the euro nearing resistance last hit in 2010, it seems likely that the Bank of England will need to do more to support the economy. So far, more aggressive large-scale asset purchases (also known as quantitative easing) have not been announced, but pressure may be growing should economic data continue to weaken. This in turn could serve as a catalyst to cause a break in the pound as more currency printing pushes purchasing power lower.

We live in a world where seemingly everyone wants to have a weak currency. That's because everyone wants to export to everyone else, and a weak currency helps with that by making goods cheaper to foreign buyers. I like to think of a weakening currency as a way of importing inflation from buyers outside of a country's borders. When in a recession and highly levered, this is (in theory) a desirable outcome since importing that inflation can help make the burden of debt less as revenue flows into the system from purchases. The Bank of Japan explicitly targeting 1% inflation (with pressure to increase that target to 2%) did cause the yen (FXY) to fall following the announcement of that change to monetary policy. That helped ease concern (briefly) about the huge debt load Japan has....285 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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