December 7 that German media said that the good news during the crisis is currently stimulating the stock exchange, but there are also major risks. Experts warn that the currencies of many emerging market countries are rapidly appreciating. There may be a currency war and serious consequences for the world economy.
After reports of the successful development of a coronavirus vaccine and the change of the U.S. regime, the euphoria of the stock market may remind people of a well-known ghost in the money market: the currency war. Given the rapid appreciation of high-risk currencies and the decline of the dollar, strategists say there are concerns about the post-pandemic era.
According to the report, a large amount of money has been channeled to emerging market countries because of the renewed willingness to take risks. There, investors see opportunities to return higher than in industrial countries, especially with zero interest rates now, and holding or buying more bonds in these countries will have little benefit.
Since June this year, the currencies of many emerging market countries have been appreciating, and the strong growth of the corresponding index in November was unprecedented in the past two years.
Manick Nalain, chief emerging market country strategist at UBS, said: “I think the term currency war seems too fierce at present, but it can be said that the first wave of warnings has been issued.
If the currencies of these economies continue to strengthen, they may increase their counterattack. South Korea and Thailand are already intervening in foreign exchange markets or taking other measures to prevent the appreciation of their currencies from slowing down the economic recovery.
Since June, the currencies of the Mexican peso, the South African rand, and China and South Korea have reportedly appreciated by 5% to 12%. According to the estimates of the International Finance Association, last month alone, $40 billion went to the stock market of emerging market countries and $37 billion went to the bond market, more than ever before. “If people see a currency war, it’s going to be in the market where capital flows most,” said Pramor Davan, who manages emerging market national funds at Pacific Investment Management.
The report pointed out that the appreciation of the local currency usually hurts export-oriented economies. Economies in this dilemma may launch a devaluation race to save themselves at the expense of other countries.
When Brazil’s then finance minister Guido Mantega talked about the currency war in September 2010, the dollar fell by more than 10% in three months and even depreciated by 17% in June 2011.
This time, the dollar fell about 11% in eight months, and experts believe that it will continue to fall next year. Morgan Stanley predicts another 10% decline in the dollar, and Citigroup even predicts a record 20% decline.
Robin Brooks, chief economist of the International Finance Association, expressed doubts that this alone would trigger a currency war. The currencies of emerging market countries are still depreciating by about 5% compared with the beginning of the year, and some of them depreciate even more.” To be honest, if I were a central banker in an emerging market country, I would be happy that our currency appreciated every day,” Brooks said, because in this case, it would be more beneficial to repay the dollar loan.
However, tensions are increasing. Because not only the currencies of emerging market countries are appreciating, but also the euro and yen are also appreciating.