Prepare For New ‘Currency Wars’ After QE3: Analyst
September 17, 2012
The Federal Reserve and the European Central Bank’s new rounds of quantitative easing could herald a new era of “currency wars”, according to Bank of New York (BNY) Mellon research.
The dollar fell to a seven-month low against the yen and a four-month low against the euro last week after the Fed announced a new round of quantitative easing (QE3) on Thursday. Under the latest plan, the Fed will buy up $40 billion of mortgage-backed securities a month in order to stimulate the U.S. economy.
Adding insult to the greenback’s injury on Friday, the ratings agency Egan-Jones cut the U.S. sovereign rating to AA-minus from AA, saying the Fed’s QE3 would reduce the value of the dollar, rather than reduce national debt.
“The Fed’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality,” the firm said.
Central banks such as Brazil and others around the globe are already moving to mitigate the effects of the “debasement” of the dollar by taking “measures to prevent excessive currency strength,” according to BNY Mellon.
Imposing capital controls is nothing new, BNY Mellon pointed out in a note, as many central banks instituted such policies to prevent their currencies from strengthening back in 2010 when the phrase “currency wars” was first coined by the Brazilian finance minister, Guido Mantega.
Back then, BNY Mellon said, there was broad consensus around capital controls by emerging and established economies such as Brazil, Colombia, Taiwan, South Africa and Russia, which endorsed by the IMF under the leadership of Dominique Strauss Kahn.
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