ECB's Draghi Assessing Impact Of Strong Euro
The yen has fallen sharply as the Bank of Japan has been given a new 2 percent inflation target that may well see more yen created. Investors have concluded that the yen will continue to fall. The reverse of that is that other currencies will continue to rise, including the euro.
Bundesbank President Jens Wiedmann warned last month about the politicization of the Bank of Japan and of possible unintended consequences to the international monetary system.
"Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way," he said.
The idea of a currency war raises the specter of the 1930s when countries around the world pursued "tit-for-tat" policies with their exchange rates in order to get an edge. However, the outcome was to decimate global trade, accentuate the depression and sow the seeds for World War II.Though Draghi sought to downplay talk of a currency war and assigned most of the recent movements in the foreign exchange markets to changes in countries' economic policies, his comments were different to those of his predecessor, Jean-Claude Trichet. The fall in the value of the euro following Draghi's remarks will likely be greeted by France's Hollande, who on Tuesday suggested that the ECB use its powers to bring the value of the euro down. "The euro should not fluctuate according to the mood of the markets," he said at the European Parliament. "A monetary zone must have an exchange rate policy. If not, it will be subjected to an exchange rate that does not reflect the real state of the economy." If inflation, which Draghi said is expected to fall below 2 percent in the months to come, drops by more than anticipated, then it could pave the way for interest rate reductions â¿¿ one of the main factors that investors assess when deciding which currency to buy.
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