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Hint of currency war in the air - Commerzbank

FXStreet (Córdoba) - Weakening their own currency appears to be en vogue with central banks at present and for those who actually try to do so, the currency market is delivering the desired effect, said Ulrich Leuchtmann, analyst at Commerzbank. According to the analyst, whether we will see more of this trend will also depend on the Fed’s reaction.

Key Quotes

“The Australian central bank, its New Zealand peer and the ECB: They all wish to weaken their own currencies. And the currency market is currently delivering what they want: Since July, the dollar has gained considerably against all other G10 currencies”.

“On the one hand, this is due to fundamental reasons. The Fed is increasingly making clear that it will quickly start hiking interest rates next year. The US economy’s solid recovery in combination with the fact that – in contrast to widespread fears – bond and equity markets have not yet come under noteworthy pressure opens up room for the Fed to manoeuvre”.

“On the other hand, many of the central banks which are obviously keen to weaken their own
currencies are currently believed to be able to do anything”.

“Will the Fed be ready to accept an even stronger rise in the dollar ? Now the Fed could be patient, in principle. After all, it is striving for tighter monetary policy anyway. So, basically, it should not care whether this will be achieved by interest rate hikes or a stronger dollar”.

“However, the combination of lower interest rates and a strong currency provides the perfect breeding ground for speculative bubbles on capital markets. The Fed will probably dislike a less favourable policy mix being imposed on it. There is once again a hint of “currency war” in the air”.

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