April 23, 2013 / 6:39 PM / 5 years ago

The realities of a currency war

NEW YORK (Reuters) - The world’s biggest developed nations, particularly Japan and the United States, have engaged in various efforts to lower interest rates to stimulate consumer demand that some investors have taken to calling a “currency war.”

Even though central banks are not directly intervening in forex markets, what they’re doing amounts to a de facto forex war because the effect is the same - weaker currencies.

“Yes, we are in a currency war. The G20 now basically calls as it is - every country is free to run the monetary policy necessary for its own economic growth,” said Alessio De Longis, senior currency portfolio manager, at Oppenheimer Funds in New York. He spoke at Monday’s Reuters Global FX Summit in New York.

Oppenheimer has $208 billion in assets under management.

The Federal Reserve has been in quantitative easing mode since late 2008, but it was the Bank of Japan’s easing earlier this month that really shook the market.

The BoJ rocked financial markets early, unleashing the world’s largest monetary stimulus in committing to inject $1.4 trillion into the economy in less than two years. That sent the yen reeling on April 4 after the BoJ announced the move, falling more than three percent in a single day.

The yen has tumbled more than 14 percent so far this year against the dollar.

The Group of 20 developed and emerging economies at a meeting over the weekend effectively affirmed its acceptance of the BoJ’s aggressive stimulus policies.

The Bank of England and the European Central Bank, on the other hand, decided to hold off on further stimulus, but were downbeat on their economies, which should keep their currencies on the defensive as well. In the case of the BoE, investors expect the bank will introduce more stimulus measures to resuscitate its flagging economy.


The most straightforward way to play the currency war is still to sell the yen. That’s still the most popular trade among asset managers interviewed at the summit.

Axel Merk, president and chief investment officer at Merk Investments, said he has been short the yen since November last year primarily against the dollar. He has been selling short-term yen forward contracts, representing a significant proportion of his portfolio. Merk believes as the BoJ continues to ease, this may be the beginning of the end for the yen as a safe-haven currency.

“The yen is no longer the safe haven that it used to be because of its deteriorating current account balance. And with a debt to GDP ratio of 200 percent, the yen has no chance of surviving,” said Merk.

“When you add to that Japan’s extremely aggressive fiscal and monetary approach, then you know that the yen is in deep trouble.”

Oppenheimer’s De Longis said the short yen position is also the fund’s “highest conviction” trade. He added that the BoJ would be successful in weakening the yen, but he wasn’t sure whether the central bank would be able to boost inflation to its two percent target.

The BoJ has put itself out on a limb by declaring the two percent inflation goal is achievable within two years, and is clearly ready to do whatever it takes to ensure that happens.

Still many believe it’s a crowded trade.

In the case of FX Concepts, a currency hedge fund with about $2 billion in assets under management, it has exited its short yen/long dollar position. In fact, the fund’s chairman and chief investment officer John Taylor said the firm is betting on the yen strengthening in the near term due to expectations of a global slowdown in the second quarter.

“We don’t see the second quarter as a very good quarter for global growth and the normal relationship of that is that money comes back to the yen,” said Taylor.

“We’re forecasting the yen to be strong between 92-100 to the dollar on the topside by July.”

The dollar rose to within striking distance of 100 yen on Monday, a level last breached in 2009.


But in this day of free-floating exchange rates, deliberate currency debasements would reap just short-term benefits, said Ken Dickson, director of currencies at Standard Life Investments in an earlier interview. Standard manages $272.6 billion in assets.

Governments like weaker currencies because they improve domestic demand by making imports more expensive and exports more competitive, which ultimately results in economic growth.

However, Dickson said there is no real evidence of this, at least in the current environment.

In addition, when a country subsidizes one’s exports with an artificially weak currency, businesses lack an incentive to innovate. Japan is the best example.

Merk of Merk Investments, thinks Japan’s problem is not a strong currency, but a lack of innovation. By weakening the yen, Japanese companies are given a “free ride,” taking the motivation away to create new products and undertake reforms.

Follow Reuters Summits on Twitter @Reuters_Summits

(For other news from Reuters Global FX Summit, click on www.reuters.com/summit/FX13)

Reporting by Gertrude Chavez-Dreyfuss; Editing by Chris Reese

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