From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. If you are interested in Morningstar featuring your content, please contact Online Editor Holly Cook (holly.cook@morningstar.com). In this video, Robin Bew, Editorial Director and Chief Economist at the Economist Intelligence Unit, shares his views on the perceived threat of currency wars. Bew says a lot of changes in both currencies and domestic policy are needed for the global economy to rebalance.
Tony McMahon: Hello and welcome to the Global Forecast from the Economist Intelligence Unit. My name is Tony McMahon and as ever I'm joined by Robin Bew. Robin, what about this perceived threat of currency wars? Are we seeing an attempt by economists to maintain competitiveness by going down this route?
Robin Bew: Well we're not seeing a fully blown war but clearly there is a lot of tensions around currency at the moment. A lot of that is wrapped up with China and its almost fixed exchange rate with the US dollar and the way that that is impacting on the rest of the world, and it seems pretty clear that we need to see a lot of changes if the global economy is going to rebalance and be allowed to grow in a more sustainable way.
Some of those changes are about currency. Some of them, of course, are around domestic policy. But there is a lot of tension and while it wouldn't be right to say that there is whole scale intervention happening all around the world and that we're in a full scale currency war, certainly the mood music has deteriorated over the course of the last couple of months or so, and you could imagine that in six months' time, if we don't see some movement, there may be more countries that feel that they have to intervene more aggressively to try and gain an advantage over their partners.
McMahon: The euro has strengthened against the dollar over the past month but you maintain that in the medium-term it will weaken against the greenback. Why is that?
Bew: Yes, at the moment the game is to sell the dollar. Everyone is extremely negative about the dollar and some other currencies have risen as a result, including the euro, and people are worried about a double dip in the US.
Clearly, the Fed is talking very strongly about quite a lot more quantitative easing with implications of course for the currency. So there is a very negative story about America and actually a very positive story about high-yielding currencies elsewhere, although of course the euro is not actually one of those. So in the short-term, dollar weakness looks a pretty sure bet.
I think in the longer term, in Europe, we're not going to see much move on monetary policy for at least the next couple of years or so. The economic situation is pretty poor, so the ECB is going to remain very accommodative.
It does seem to me that the narrative has swung so far against the dollar that it would only take one or two pieces of good economic news for you to see actually pretty sharp reversal in the US. At the moment, everyone is very negative, but you could imagine that one decent payrolls number and the dollar could spike pretty sharply. So our sense is that America, policy, yes, it is very loose but the economy is not flat on its back.
The European story is actually that policy is going to remain very loose for a very long time and actually the underlying economic story there is much worse. So we think in the long run, euro weakness looks pretty likely.
McMahon: Turning to the Asian currencies, Japan intervened for the first time in the foreign currency market since 2004. What was the reason for that?
Bew: Well they were getting very worried that the yen was moving towards its highs of almost 20 years ago at ¥80/$1. Actually, though, I think their ability to fundamentally change the game in terms of the exchange rate is pretty limited.
Intervention is effective when you're pushing in the direction the market wants to go, but at the moment, everyone is very negative on the dollar and that's falling out on a lot of currency strength for the yen and actually in real terms the yen is not as strong as people think. They've had a lot deflation since the last time we saw the yen approach these kinds of levels and when you talk to exporters over there they can probably withstand this kind of currency rate for quite a long time. So I think you might see a little bit more intervention. Certainly a lot of effort to talk the currency around, but I don't think they can do very much, really.
McMahon: Now you've launched a new global forecasting service here at the EIU. Would you like to tell me a bit about that and what the benefits are to users?
Bew: Yes, it's actually making our global forecast and our thoughts about some of the key regions around the world available for free on the internet. So the global forecasting service looks at the big themes around the world, but also contains the economic outlook for America, for Japan, Western Europe and all the emerging market regions to and looks a bit at currency and what we think is happening in commodity markets. We've made it available for free because we think businesses benefit enormously from having a very good broad overview about what's happening around the world. Ultimately, companies want to talk to us about specific markets and the places where they're trying to make business decisions. But being able to make those decisions with a kind of broad backdrop about what's going on around the world, not just now but in the next few years, we think is very helpful and so we've pushed it into the market for free. If anyone would like to take a look it's available on the internet if you just Google for the global forecasting service.
McMahon: Thank you, Robin. Well for more on the world economy join us again at the Global Forecast next month. Until then, thank you and goodbye.
This video was supplied by Cantos.
