The biggest loser: Europe and the global currency war

In currency wars, where some countries pursue policies deliberately aimed at cheapening their currencies, there are generally winners and losers. Judging by recent currency movements, Europe is the biggest loser in the present global currency war. Since the middle of last year, the euro has appreciated over 25 percent compared to the Japanese yen and over 10 percent compared to the U.S. dollar. This is most unfortunate, since an appreciating currency is the last thing that Europe needs if its economy is to emerge from economic recession.

The principal factor driving recent currency movements has been the divergent monetary policies of the world’s major central banks. While the U.S. Federal Reserve, the Bank of Japan, and the Bank of England are all now engaged in maintaining extraordinarily low interest rates and are resorting to aggressive quantitative easing, the more conservative European Central Bank (ECB) is bucking that trend for fear of igniting longer-run inflation. Thus, it is little surprise that the countries aggressively printing money are seeing their currencies depreciating against that of the European economic zone, whose central bank is hewing to a much less expansionary monetary policy stance.

Sadly for Europe, the prospects for a weakening euro anytime soon do not appear to be good.Sadly for Europe, the prospects for a weakening euro anytime soon do not appear to be good. The U.S. Federal Reserve has committed to continue buying $85 billion a month in mortgage-backed securities and U.S. Treasury bonds until U.S. unemployment moves toward 6.5 percent. Given the tepid rate of U.S. economic growth in prospect for 2013, such a reduction in unemployment will presumably not come close to occurring this year. This would imply that the Federal Reserve will continue to aggressively print money throughout the year. Meanwhile, prospective changes at the helms of the Bank of Japan and the Bank of England are suggestive of more aggressive quantitative easing in both Japan and the United Kingdom for the rest of this year, as both of those countries opt for more accommodative monetary policies to spur economic growth.

Read the full text of this article at www.american.com.

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