It’s getting hard to find anything original or non-clichéd about currency wars and quantitative easing, which makes Edward Hugh’s take on it all the more worthwhile.
He lays out the stakes pretty nicely here:
And the seriousness of the situation should not be underestimated. Many have expressed disappointment that the recent IMF meeting couldn’t reach agreement, and hope the forthcoming G20 can do so. But really what kind of agreement can there be at this point, if the real problem is the existence of the ongoing imbalances, and the inability or unwillingness of the Japan’s, Germany’s and China’s of this world to run deficits to add some demand to the global pool. Push to shove time has come, I fear, and if this reading is right then it is no exaggeration to say that a protracted and rigorously implemented round of QE2 in the United States could put so much pressure on the euro that the common currency would be put in danger of shattering under the pressure. Japan is already heading back into recession, as the yen is pushed to ever higher levels, and Germany, where the economy has been slowing since its June high, could easily follow Japan into recession as the fourth quarter advances.
What’s remarkable about the euro’s rise isn’t just that it’s risen so fast, or that the continent hasn’t addressed any of the core issues that were shredding it up in the first half of the year, but that while every other central bank is playing the devaluation game, the ECB hasn’t even taken the field.
Sure you get the occasional meek jawboning about how the Euro is too high or whatnot, but they’re not bringing any serious fire power to this endeavour at all.
There’s also no reason to think that maybe somehow the ECB wants a strong euro. It’s clearly hurting the periphery and even hurting German exports. The uber-strong euro is really a sign of EU dysfunction and paralysis.
Of course, the weak dollar (and therefor the strong yen) is also hammering Japan.
Hugh points to this Reuters report from Friday:
Toyota Motor Corp is considering building its second car plant in Mexico to boost local output due to the yen’s strength, the Asahi newspaper reported on Saturday.
The yen’s rise to a 15-year high against the dollar is threatening the competitiveness of Japanese exports and prompting manufacturers to consider shifting more output outside Japan.(Via Marginal Revolution)