Currency war fears and realities often reflect widespread economic crisis worries. From time to time during the ongoing international economic crisis that emerged in 2007, marketplace wizards and political sages have warned of currency wars. Many such observers label and bemoan currency battles as “bad”, especially if such competitive devaluations involve several key trading nations around the globe. Nevertheless, many countries view devaluation of their home currency (whether “in general”, or in a cross rate against another nation) as “good”, at least so long as such tumbles are “not excessive”. Might depreciation boost exports and thus help to generate the blessings of growth? Or, might depreciation (at least up to some point) reduce the burden of outstanding debt obligations denominated in the home currency? Thus, in some realms (or at least for powerful economic camps within such territories), depreciation (and sustained currency weakness) ironically often is akin to a military victory.
In recent months, the US dollar and Japanese Yen have fallen, the Yen especially dramatically. However, the greenback already was feeble from a longer run historical vantage point, and its erosion has been rather steady since around June 2012. In America, the Federal Reserve and many politicians clearly endorse a relatively weak dollar. Look at the Fed’s massive and sustained money printing and rock-bottom Federal Funds rate. Have American economic generals in recent months been shouting about the merit of a “strong dollar”? The recent Japanese election and political pressures has accelerated the Yen’s weakness that emerged during 2012.
A weak US dollar in recent years often has been associated with bullish moves for US equities (S+P 500). Recent Yen weakness helped to rocket Japanese equities (Nikkei 225) sharply higher from their 6/4/12 (8240) and 10/15/12 (8490) valleys. The Yen’s weakness began from a so- called very strong level, so perhaps its decline will enhance Japan’s economic growth. Will this Japanese expansion, if it occurs, do so at the expense of others? Perhaps.
For the US, the broad real trade-weighted dollar probably will challenge its July 2011 record low depth in the relatively near future. A decisive breach of that bottom would not be surprising. A challenge of the July 2011 low, and therefore a break beneath it, probably would not be bullish for the S+P 500.
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Currency Wars, Dollar and Yen Slides (2-1-13)