The New Currency War
How the value of currency impacts the economy.
A country's currency is the country's economic strength – simple as that. Many Canadians are probably proud of the fact that the exchange rates between the Canadian Dollar and the US Dollar were almost 1:1. By 21:15 last evening, the US Dollar (USD) traded for 1.0055 Canadian Dollars (CAD). Only in January 2010, the exchange rate of the USD/CAD was around 1.25 CAD per 1 USD, meaning that the Canadian Dollar got stronger by 20%.
Yes, we are proud. But we have to ask ourselves whether a strong Canadian Dollar is good for Canada, or is it good for the US and other world countries. The answer would probably be: "Good for the US".
For example, as Canadians we find it cheaper to travel in the US because our Dollar is strong and we get more for our money. But when we spend our money in the US we are supporting the American economy and not the local one.
When a Canadian company exports its products to the US markets it receives its revenues in US Dollars. However, a strong Canadian Dollar causes a decrease in the company's revenues and profits in terms of the local currency. Sometimes, when the local currency is too strong, the exporting companies are in a continuous stress and the importing companies enjoy high revenues and profits.
Therefore, a country's strong currency may be a short term pride, but also a long term risk to the delicate balance of its economy.
Stanley Fischer, the Governor of the Bank of Israel, is facing a currency dilemma for the aforementioned reasons. Fischer is trying to cool down the markets and inflation by increasing the Central Bank interest rates and at the same time has already purchased over $40 Billion in order to keep the Shekel artificially low and save the Israeli export.
Ben Bernanke is having hard times in his powerful position. He keeps interest rates to a minimum and by that causes a long term devaluation of the US Dollar. A weak American Dollar should help US exporters with their businesses and make it hard for importing companies, a situation that is supposed to decrease the scary US international debt.
The Australian Dollar (AUD) went through a remarkable "come-back". Trading at only 65 US cents at the beginning of 2009, the Australian Dollar kept climbing and climbing and early last evening traded at 99 US Cent, an up-side of over 52 percent, an incredible figure in a period of less than two years.
Can all this be considered a currency war? Yes it can. Paradoxically, all countries want their currency to be weak in order to strengthen the local economy during a global crisis. China does it artificially by keeping the Chinese Yuan low for years. Jean Claude Trichet, the Governor of the European Central Bank is barely managing to maneuver the continent's economy due to problems in many European states, high unemployment rates and a strong Euro which, as we all understand, is bad for Europe.
The Governor of the Bank of Canada, Mark Carney, has increased the Central Bank interest rate by 0.25 per cent to a level of 1% per annum. Carney’s monetary policy is to keep the economy as stable as he can.
His decision was influenced by local parameters such as the expected inflation for the coming twelve months, the unemployment rates and other economic factors in the local economy. He also looked carefully into his colleagues' monetary policies around the globe and took his action to what he thinks is best for Canada.
Are we in world currency war? Probably yes, and the world's Central Banks’ Governors are the generals who command the army of the economy.