Done with One War? On to the Next!

Oh, how the times have changed! Do you remember the days when everyone was worried about a currency war boiling over? Central banks were duking it out on the economic battlefield, trying to keep their currencies from appreciating to give their exports industries a competitive edge in the global market.

It was a lot like playing Call of Duty: Black Ops online… except much, much nerdier.

China was getting a lot of flak from all over the world for not letting the yuan rise more freely. Asian nations, such as Singapore and Thailand, were regularly weakening their currencies in the markets to give them a chance against China. And basically, everyone was crying foul over everyone else’s practices!

New battlefield, new enemy

It’s hard to imagine that that was just a few months ago. These days, it’s a totally different scene. The currency war has died down, but now central bankers have another battle on their hands, one against a common enemy – male pattern baldness! Oops, I meant inflation!

Nowadays, central bankers seem to be more preoccupied with inflationary threats than export competitiveness. As a result, rather than seeing market interventions to weaken currencies, we’ve been seeing central bankers tighten up their monetary policies – a move that tends to strengthen currencies.

Taking arms against inflation

The weapon of choice against inflation? Rate hikes!

The very same nations that had intervened to keep their currencies from rising have taken arms against inflation by raising interest rates. And they haven’t been complaining about the upward pressure on their currencies either! Just this week, Singapore beefed up its rates by 0.25%, which sent the Singaporean dollar flying through the charts.

To protect itself from rising prices, even the People’s Bank of China has been tightening its policy, most recently with a 0.25% rate hike earlier this month. Since the start of the year, it has allowed the yuan to climb 1% in value against the Greenback. This just goes to show that even China has had to loosen its grip on its currency to combat rising prices.

Major central banks are no exception either. Among them, the European Central Bank (ECB) was the first to draw blood against inflation with its decision to hike rates last week. Many see this as an ongoing battle that may require the ECB to raise rates by another 0.75% within the year. These high expectations have translated to massive gains for the euro, propping it up almost 12% against the Greenback in the last three months.

What about the others, you ask? Many are expected to follow suit and take arms against inflation as well. As a matter of fact, market players see the Bank of England, Bank of Canada, and Fed raising rates within the next twelve months!

At this point in time, I guess it can be said that the currency war is over. But clearly, central bankers are still not at peace. Then again, with inflation on the attack, who would be?