The Fuel of a Currency War, Part 1

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Article Summary: The world’s biggest Central Banks also have stumbled on massive intervention efforts to stimulate their markets, most that can be derived from money policy which were eloquently dubbed’The Global Currency Wars.’ Within the following piece, we consider the consequences of a strengthening money. In another articlewe examine money devaluations.

Central Bank intervention, with most reports, has saved that the worldwide market from spiraling into a fiscal abyss. Five years from the beginning of The Financial Crisis finds that the entire world’s biggest Central Banks continued to nourish the economic climate in a bid to continue to keep it from melt.

Intervention campaigns are active in The United States, Europe, Japan, Switzerland, and so they played a prominent part in China through the duration of 2012 since the country attempted to stop the’hard landing’ that many had predicted.

Todayusing the S&P sitting close 5 year old highs after simply crossing the visionary’1500′ emotional degree, it seems like tragedy was avoided; in the least now, since these huge intervention efforts have counter some quite worrying financial statistics.

Much of the intervention is situated around what might grow to be a stressing assumption; also here could be actually the idea that averted Central Banks from having bigger stimulation efforts in years’ prior. This is something that has been practiced in many different forms since the dissolution of the Bretton Woods compact when currencies were allowed to free-float against the valuations of other currencies.

Currency Devaluation

This may sound somewhat counter-intuitive, but devaluing a currency is, in-and-of-itself, a form of stimulus. On the other side of the coin, a strengthening currency can add massive pressure to a nation’s exports; and for a country dependent on those exports, that stronger currency can bring catastrophic consequences.

Let’s take the case of Japan, a country with a strong export-based economy that has recently taken to massive devaluations of Yen in an effort to stimulate their economy. A major export of Japan is automobiles, so let’s look at the effect of a stronger or weaker yen on Japanese auto exports.

Let’s say that in 1999, with the USDJPY trading near 150.00, a Japanese auto manufacturer could sell a car in the United States for $30,000, and it cost them ВҐ3,500,000 to produce, ship, and sell the car.

Eight years later, and markets were much different — seeing a spot quote on USDJPY of 100.00, a loss of 33% on 150.00 USDJPY price that was looked at previously.

This change in the exchange rate has a drastic impact on our car manufacturer. The producer was previously looking at a profit — but now, they are looking at a loss.

What was previously a strong and tidy profit on each car sold, has now turned into a loss for every single unit. And our manufacturer didn’t do anything wrong! They were only continuing to make the same car, with the same costs and production methods as earlier — but now because of this strong currency, they are forced to take a loss on each and every unit sold.

As we can see in this example, a strengthening currency adds pressure to a nation’s exports, making it more difficult to sell goods in other economies.

In this situation, our car manufacturer has some tough decisions: Either increase the price of their car (making it less competitive), or absorb the loss. Neither of these are really great options from a business standpoint.

We can see the effect that a stronger currency has on an economy by focusing on Japan since the late 80’s. The erosion of the USDJPY quote has had some dire consequences for our automotive manufacturer in our above example, and this isn’t too different from the fate seen by many Japanese companies.

One need only to look at the value of the Nikkei over the past 25 years to see what strengthening Yen has done to the Japanese economy:

The Erosion of the Nikkei brought on by a Strong Yen

Competition in the Market Place

As mentioned previously, companies in this position don’t have the luxury of Several options to cancel this more powerful money. By making their products more costly (and less competitive)they still stand to sell fewer cars. Or, rather — they are able to only attempt to consume the loss and maintain their competitive standing; trusting that, finally, their money will likely weaken, permitting income to return set up.

Either way, most employers in this position have a challenging road ahead — while they’re reliant on exports which tend to be increasingly more challenging to sell as a stronger money makes them expensive.

— Written by James Stanley

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