Weaker Currencies Are not Helping Growth

A weaker currency, once the cure-all for ailing economies around the world, isn’t the panacea it once was.

Just look at Japan, where the yen plunged 28 percent in the two years through 2014, yet net exports to America still fell by 10 percent. Or at the U.K., where the pound’s 19 percent tumble in the two years through 2009 couldn’t stave off a 26 percent decline in shipments to the U.S. In fact, since the turn of the century, the ability of exchange-rate movements to affect trade and growth in major economies has fallen by more than half, according to Goldman Sachs Group Inc.

The findings suggest that weaker currencies may not provide much assistance to officials in countries like Japan and the U.K. that are relying on unprecedented easy-money policies to help boost tenuous growth and inflation. On the flip side, the data also indicate that concerns the U.S. recovery will be derailed as rising interest rates drive investors into the dollar are also overblown. A shift in the structure of advanced-economy trade to less price-elastic goods and services, combined with the prolonged effects of the financial crisis, have stunted the sensitivity of trade volumes relative to global exchange rates, according to Goldman Sachs analysts led by Jari Stehn.

“If you’re a central banker, yes you’re paying attention to currency levels, but the more-developed market economies aren’t reacting to currency debasing policies like they used to,” said Philippe Bonnefoy, the founder of Switzerland-based hedge fund Eleuthera Capital AG. “The impact has been diluted.”

via Bloomberg

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza