Climate change for the currency market

Currency movement is something I have been watching rather attentively this year. The baht has already appreciated about 4% since January, trading around 29.30 to the US dollar yesterday. I cannot help thinking how far we have come from the point when the baht was worth much less _ 50 to the dollar and 90 to the pound in early 1998.

I remember I almost made the best investment decision of my life by buying a property in Cambridge in 1995. Unfortunately, I did not. Just think how much I would have made out of a UK property after the 1997 Thai currency devaluation and the up-cycle of UK housing prices that followed!

Again, there is no such thing as a perfect investment or perfect decision, especially in this environment. Many hopes for recovery are now being pushed back. Despite some positive news, major weaknesses in the global economy persist. In the United States, sweeping budget cuts could slow an otherwise promising recovery.

In the euro zone, the never-ending debt crisis continues, and the post-election stalemate in Italy and the bailout controversy in Cyprus are but the latest episodes of the drama. A proposed one-off levy on bank deposits to finance the bailout caused panic selling in the global financial markets, raising doubts about Cyprus's future in the euro, and severely weakening investors' confidence in Cyprus and in other vulnerable European nations.

For the last couple of years, we have seen the Big Four central banks (the Federal Reserve, ECB, Bank of England and Bank of Japan) trying to revive domestic demand and investment by maintaining extremely low interest rates and engaging in quantitative easing (QE). Lower interest rates and large liquidity injections have so far resulted in weaker currencies.

Clear examples have been the sharp fall of the Japanese yen and British pound. Since the year began, the yen has fallen by about 8% against the US dollar, while the pound has fallen by close to 7%. In both cases, domestic factors have been extremely important drivers of depreciation.

The significant driver of the yen's decline was the change in the Japanese government and a new direction for economic policy following the December election. This has exerted pressure on the central bank to ease monetary policy further by committing to a 2% inflation target and announcing an open-ended QE programme.

In the UK, the falling pound largely reflects a weak growth outlook, and signs that the central bank is more open to further QE than previously thought. The UK's loss of its AAA sovereign rating following a downgrade by Moody's is probably another negative factor for sterling.

Large movements in major currencies have presented an additional complication for the already turbulent financial markets and made the talk of a currency war more widespread.

Usually, for a currency war to occur, a number of major economies must try to devalue their currencies. That makes a country's exports cheaper and more attractive for foreign buyers. But the trouble is that when each country pursues a similar strategy at the same time, no country gains an advantage over its trading partners. In the past, this has only happened during a global economic downturn such as the Great Depression in the 1930s.

Emerging economies, led by Brazil, first accused the United States and China of starting a currency war. As evidence they pointed to the Fed's various QE programmes and the widely held view that Beijing was keeping the renminbi undervalued. The concern about a currency war was again heightened when the new Japanese prime minister promised a large stimulus and called for weaker yen to revive exports.

The growing talk of currency war, however, is probably overdone. Although it looks as if a currency war is happening, as many of the largest economies are pursuing policies that could weaken their currencies, they are doing so for completely different reasons _ to address domestic economic problems rather than to boost exports. Currency depreciation is therefore just a byproduct, and not an objective.

It probably would be helpful to analyse whether a currency is moving as a result of domestic monetary policy or direct intervention. And if there is intervention, it would be better to distinguish deliberate currency manipulation for some type of special advantage from attempts by authorities to correct a perceived currency misalignment.

In the wake of tensions in the currency market, there are always two sides of the same coin. Thailand and a lot of countries will likely benefit more from attempts to improve global economic conditions than from the loss of any trade competitiveness, as trading partners' economic growth remains an important driver for exports.

Meanwhile, exports of services also appear to be quite resilient in the face of currency appreciation, growing at almost 20% last year and continuing to perform quite well into 2013. The number of tourist arrivals to Thailand has hit an all-time high with occupancy rates at the highest levels on record. A stronger currency also brings us a sense of wealth. It is now cheaper to take a vacation abroad, or to buy companies outside the country.

A strong currency cannot be all that bad. And in this environment, countries should really concentrate on fighting the recession, and not each other.

Dr Tientip Subhanij holds a PhD in economics from the University of Cambridge, and currently has a career in banking as well as academia. She can be reached at

About the author

Writer: Tientip Subhanij
Position: Writer