Financial markets’ euphoric reaction to the recent COVID-19 vaccine breakthroughs and U.S. election results is pushing some currencies up so fast that rumblings have begun about a potential new foreign exchange war.
Almost a decade after Brazil’s finance minister likened Western central bank money-printing to economic warfare, some of the conditions that led countries to weaken their currencies then look to be forming again.
Investors’ growing eagerness to buy into risky assets gave emerging market currencies their best month in nearly two years in November, stretching a run of gains that started in June.
A further extension — seen as likely after the dollar hit a two-year low on Thursday — would mark be their longest uninterrupted climb since 2012.
South Korea, Taiwan and Thailand are already worried enough that they have either intervened in their foreign exchange markets or taken other steps to try to prevent fragile economic recoveries being snuffed out.
In Sweden, whose crown is this year’s best-performing currency, the central bank unexpectedly increased its money-printing programme last week.
The currency war would be a bit of a dramatic term to use right now, but one can say that there have been some early warning shots, a UBS’s top ranking officer reckons.
If this currency strength continues, these countries could start to push back harder, experts suggest. Competitive currency devaluations are blamed by economists for exacerbating the 1930s Great Depression and dragging for decades on world trade by fostering protectionism.
The cycle usually starts with tit-for-tat interest rate cuts and interventions, but can quickly escalate into capital controls or investment taxes to ward off hot foreign money like that now flooding into emerging markets.
Institute of International Finance data on Tuesday, 1 December 2020 showed investors splurged a record $40 billion on stocks and $37 billion on bonds in emerging markets last month, a spree that was more than the previous three months combined.
The Mexican peso, Brazilian real, Turkish Lira, South African rand, Russian rouble and Polish zloty all jumped between 5 percent and 10percent, adding to 5-12 percent leaps in China, Taiwan and Korea’s currencies since June.