The euro/U.S. dollar pair could easily be impacted in the event that the fears some have expressed about a currency war being started indeed come true.
Individuals who want to make money trading the pair might benefit from knowing about such developments.
Expert: Currency war has been started
James Rickards, an advisor to the White House and the Pentagon, stated that the recent decision made by the European Central Bank to lower its key rate means that we are currently in a situation where different nations will strive to devalue their currencies in an effort to prompt global market participants to buy more of their exports, according to CBC News.
Central banks across the world have been engaging in robust purchases of debt-based financial instruments in an effort to stimulate their economies. For example, the Federal Reserve has been purchasing $85 billion worth of assets every month since late 2012. As a result, it has pushed its balance sheet to more than $3 trillion.
Amid the robust purchases, the central banks of many different nations have been making an effort to devalue their currencies, the media outlet reported. The key financial institutions of Japan, New Zealand, Australia and the Czech Republic have all been taking part in such activities. Rickards expressed his concerns with these efforts when speaking with CBC.
“We’re not always in a currency war, but when they start they can go on for a very long period of time,” he told the media outlet. “They can go on for five or 10 or 15 years. They’re not over quickly. The reason they’re not over quickly is that there is no natural resolution.”
Central banks devalue currencies
The same day that the ECB cut its key interest rate, action was also taken in the Czech Republic to weaken the koruna, according to The Globe and Mail. The value of this currency plunged more than 4 percent on that day. In addition to the efforts of these particular nations to encourage exports, China has been taking action to keep the value of the low. In addition, both Australia and New Zealand have cautioned that their currencies should be lower compared to others.
Axel Merk, who heads up Merk Investments LLC, in Palo Alto, Calif., noted the importance of different nations making an effort to keep their currencies low in value, Bloomberg reported.
“It’s a very real concern of these countries to keep their currencies weak,” Merk told the news source during a telephone interview on Nov. 8. He stated that Mario Draghi, president of the ECB, “persistently since earlier this year, has been trying to talk down the euro.”
Stopping a currency war can be tough
It can be difficult for nations to extricate themselves from such a situation since causing appreciation in a currency can result in severe economic headwinds, according to the news source. The strength that the euro had before the financial crisis happened made the downturn worse than it could have been.
Global investors who want to make money trading currencies and currency pairs such as the EUR/USD can benefit from knowing about how they can be impacted by the asset purchases of central banks. These individuals might also obtain value by being aware of the economic conditions that would motivate one of these financial institutions to engage in such action.
Investors who want to make money by trading currencies can potentially harness knowledge of the affects that this stimulus has had – along with why such policy initiatives would be triggered – to get a sense of where foreign exchange rates could move in response to the use of these asset purchases.
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