Currency wars: the new battleground
Written by Paul Dodd on August 13, 2015.
Those of you who travel extensively might have noticed that your US dollars go a little further in recent months, but have you ever stopped to wonder why, and how long the dollar will continue to perform strongly against other currencies?
The US dollar has gained strength as the American quantitative easing programme has come to an end. In fact it is at a nine year high against other major currencies and experts believe that US interest rates will rise, stimulating demand for the US dollar and keeping it strong for the foreseeable future.
The dollar’s upward trajectory is in stark contrast to currencies in other parts of the world such as the UK, Europe and Japan where it seems to have become a race as to who can devalue their currency the quickest. The European Central Bank has just announced a new programme of quantitative easing, as have the Bank of Japan and China’s Central Bank. By pumping money directly in to the economy the banks hope to stimulate the economy by encouraging individuals and companies to spend. However in general, increasing the supply of a currency will cause it to devalue which explains why the dollar has gained strength against the euro and the yen.
The price of oil has also collapsed in recent months – prices have fallen by over 50% since summer 2014. This is largely due to a drop in global demand as economies struggle coupled with increased supply as the US has significantly upped oil production. The media often portrays falling oil prices as terrible news but, as with anything, there are winners and losers. Few of us consumers are feeling sorry for the poor oil giants when it costs less to fill up our cars and heat our homes leaving us with more to spend on other items.
In actual fact, according to the International Monetary Fund, every $20 off a barrel of oil adds 2% to GDP so, in general, the world economy benefits from tumbling oil prices. Usually a fall in the price of oil would be bad news for the dollar, causing it to depreciate, but the current economic landscape of crisis in Europe and growth in the US has had the opposite affect, pushing up the value of the dollar.
While the US dollar has strengthened, its Australian counterpart has plummeted. This is due to tumbling commodity prices - Australia is one of the world’s biggest producers of gold and the value of the Australian dollar is closely correlated with its fortunes. The Reserve Bank has just cut interest rates to a historic low, making Australian dollars a less attractive investment option. This is bad news for Aussie expats who might want to hold off on sending money home for the moment.
The variety of factors affecting exchange rates, including inflation, interest rates, balance of trade, global politics and government debt, illustrates just how complicated the bigger picture of world economics can be.
If you would like help looking at the currency implications of saving or investing while an expatriate get it touch with me and I will be happy to meet for an informal initial chat.
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