Central Bank Actions Will Reignite Currency Wars in 2015

With the European Central Bank (ECB) recently announcing new stimulus policies, some economists have highlighted that other central banks could be ready to counteract any foreign exchange fluctuations, thus increasing the possibility of a return to “currency wars.”

Last week, ECB President Mario Draghi unveiled a promise to buy purchase asset-backed securities (ABS) and covered bonds which will effectively add 1 trillion euros ($1.29 trillion) into the euro zone’s flagging economy, according to some analysts.

With more liquidity in the system and Draghi still pondering whether to launch a Federal Reserve-style government bond purchase program, the euro is expected to continue to depreciate against its peers. And this is where the problem lies, according to economists.

“(We expect) talk of currency wars to resume as some central banks will ponder the effect on capital flows and their currencies,” Claus Vistesen, the chief euro zone economist at Pantheon Macroeconomics, said in research note after the latest meeting by the ECB’s Governing Council.

The unwanted consequences of the ECB’s asset purchases could be that euro zone banks start lending more to emerging markets (EMs) to earn higher yields, according to Diana Choyleva, the head of macroeconomic research at Lombard Street Research. European bank lending – excluding the U.K. and Switzerland – to EM countries is currently close to its all-time high and is likely to rise further, she notes in her new research released on Monday.

“EU banks have ramped up their lending to developing Asia, a trend that is set to intensify. This will push the euro down,” she said.

via CNBC

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