US, Europe and Japan stimuli spark currency devaluation domino

Sep 20, 2012

Quantitative easing by major central banks is forcing other countries to take action to hold down the value of their currencies

STIMULUS spending by central banks is creating a domino effect around the globe, prompting governments from Brazil to Turkey to take steps to keep easy or "hot" money from flooding in and driving up the value of their currencies, says The Wall Street Journal. Japan followed the US and Europe yesterday in pledging to ease monetary policy to get the global economy moving. So far, only Brazil, Turkey and Peru have taken steps to ensure their currencies do not appreciate in value, mostly by dropping interest rates.

South Korea, Thailand, Singapore and the Philippines have all said they're ready to act if capital inflows become excessive. Yesterday, Nigeria expressed concern about "hot money" from the Fed.

Investors meanwhile are looking for countries that are less likely to protect their currencies from inflating, among them Poland, Norway, Mexico and Canada. Economists doubt many economies will protest too loudly.

Complaints about "hot money" during the second round of quantitative easing in 2010 came from economies like Brazil and China that were booming. Now, with every major economy seeing their manufacturing sectors slowing and exports struggling, complaints are likely to be less vocal.

"The Brazilians and the Chinese, who were among the biggest critics of QE2, I think have changed their view of it in hindsight," says former Fed economist Joseph Gagnon. "They're just less inclined to worry about it." With a succession contest around the corner, China in particular has other things to worry about, says Bloomberg.

A survey released by HSBC shows China’s manufacturing may contract for an 11th month in September, adding to signs that the world’s second-biggest economy is decelerating for a seventh quarter. Premier Wen Jiabao may need to roll out more stimulus to reduce the risk he will miss the year’s economic growth target, the report said. Barclays and Morgan Stanley estimate China’s expansion will cool to 7.5 percent - the weakest pace since 1990.

Sign up for our daily newsletter