Photo: flickr / USMC Archives
August 2010’s Jackson Hole meeting was a historic event.After the first real test to the rally that began after the stock market bottomed in March 2009, in which the market seemed poised to plunge back downward, Fed chairman Ben Bernanke pre-announced QE2 in an unprecedented expansion of the central bank’s balance sheet to boost the economy.
Only a month later, following easing decisions not only from the Fed, but from other central banks in emerging and advanced economies around the world, Brazil’s finance minister Guido Mantega made headlines after warning that an “international currency war” had broken out as countries engaged in a race to the bottom to devalue their currencies, hoping this would boost exports to other countries and thus economic growth.
The alarm bells are ringing again today as the world’s three most important central banks – the Fed, the ECB, and the Bank of Japan – are now all actively engaged in monetary easing. The Bank of England and the People’s Bank of China are easing as well.
Here’s what happened to major global markets in the three-month period after the last time a “currency war” broke out, starting in August 2010.
Risk assets obviously did well, as evidenced by stocks and commodities (S&P 500: +11.8%, Gold: +10.3%, Oil: +5.5%).
And here’s how the currencies did against each other while all of the central banks were trying to devalue:
- The euro vs the dollar: -4.3%
- The dollar vs the yen: +0.8%
- The euro vs the yen: +3.6%
- The pound vs the dollar: +1.0%
- The dollar vs the yuan: -2.0%
Japan was the victor – both the euro and the dollar strengthened against the yen. The dollar also strengthened against the euro pretty substantially, but weakened against the British pound and the Chinese yuan. However, the extent to which the currencies weaken against each other this time around will ultimately depend on the size and duration of the easing programs underway. And both are unclear in the case of some major actors like the Fed and the ECB at the moment. Regardless, Morgan Stanley believes the world is experiencing what they call the “Great Monetary Easing, Part 2” – in a recent note, analysts wrote that “the [global economic] expansion will remain supported as a large number of central banks globally (continue to) deliver more easing over the next few quarters on our forecasts – and stand ready to do much more than in our base case if Europe’s crisis deteriorates significantly.” Here’s a chart showing global central banks’ policy rate changes since 2009:
Photo: Deutsche Bank
Need to brush up on “currency wars” watch below:
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