Modern irrational market life sometimes breaks traditional molds. Countries with positive trade balance were seeking for a weaker national currency to benefit their exports. Weak Euro, Swiss Franc, British Pound and similar currencies are dependent on their exports. Thus, weaker nation currency support exports and increase budget revenues. Thus, a giveaway game continued for decades. Whoever has a weaker currency seems to be the champion.
Eventually, pandemic and Russian warfare in Ukraine became a game changing environment in 2022. The cornerstone is blistering “inflation dragon” that was released by major central banks in order to support their economies during the COVID-19 pandemic. This geared commodity prices upside and supplies contraction amid global geopolitical tensions. The outbreak of inflation boosted consumer prices by 8.3% year-on-year in the United States, by 7.5% in Eurozone, by 7% in the United Kingdom and by 6% in Canada.
Inflation has become a challenging priority for central banks worldwide, and this priority seems to be on top of stagflation risks. Both risks could be hardly mitigated at once as actions to lower inflation such as increasing interest rates would likely to slow down economy growth. However, the “inflation dragon” monster seems to be more frightening nudging monetary authorities to sacrifice growth in order to slow down this raging monster. The major risk of the weak national currency that has stimulated economic expansion has now become a sore of rising prices as imports are much more expansive now, while monetary stimulus policies led to cheap borrowings.
So, now monetary policymakers are more obsessed with strengthening of their national currencies against surging U.S. Dollar. This target would likely remain the ultimate target for the coming years before inflation would be tamed.
Goldman Sachs sees Bank of England (BoE) to become concerned over weakening Pound. European Central Bank (ECB) said it would closely monitor the consequences of weakening Euro, while Swiss National Bank noted that stronger Franc helped to bring down inflation.
What does it mean in reality? The rising Greenback would likely be opposed by leading global central banks with the exception of Bank of Japan (BoJ) that was looking to get on the inflation track for a decade. BoJ is looking for even higher inflation above the current 1.2% to bolster economic growth. Other central banks are likely to conduct currency wars inside out.
That may become another reason for monetary tightening to counter the rise of the Greenback. So, any further upside for the U.S. Dollar index above 105 points is in doubt. The Euro parity against the Dollar is getting more illusionary. The Cable forecasted rates at 1.14-1.15, lows of 2020, are seen unrealistic now.
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