Gold cannot be printed or manufactured in contrast to the currency. That’s why over the long term it has kept its value as the ultimate currency. There can be no “gold war.” However, we often hear about a currency war. Sounds familiar, where did we hear this before?
The phrase “currency war” was coined by Brazilian Finance Minister Guido Mantega after the financial crisis of 2008. The idea is that highly indebted nations weaken the value of their currency by cutting interest rates down to zero and printing fiat currency in order to gain trade advantages (cheaper products to export) and to pay less debt service on their bonds. Countries compete against each other to achieve a relatively low exchange rate for their own currency. The policy can trigger retaliatory action by other countries that in turn can lead to a general decline in international trade, harming all countries.
Concerns over a currency war prompted the Group of Seven and Group of 20 economies recently to formulize what constitutes appropriate behavior by central banks in influencing currency-exchange rates.
Let’s look at some numbers. Global currency reserves have swelled from $1.9 trillion in the year 2000 to a whopping $11.2 trillion by the third quarter of 2012. But most of that gain took place in the past six years with global currency reserves doubling to the current levels from $5.6 trillion at the beginning of 2007. If that is not evidence of the global currency war then what is? We can see two different aspects. The first is undeniable evidence of aggressive money printing, but we already know that. The second, is an indication of determined stockpiling of the currencies of other countries in order to weaken your own currency.
For a widespread currency war to occur a large proportion of significant economies must wish to devalue their currencies at once. This has so far only happened during a global economic downturn.
Under normal economic conditions countries tend to overlook a small rise in the value of their own currency. However, during a time of recession, nations can take umbrage at other countries’ devaluations.
Let’s begin this week's technical part with the analysis of the U.S. Dollar (charts courtesy by http://stockcharts.com).
Let’s start today’s analysis of the U.S. Dollar with its long-term chart.
Click to enlarge.
When we take a look at the above chart we can see that the USD Index declined once again this week. Despite that fact, the January breakout was not invalidated. As we see, the index is still above the declining support line, and thus the medium-term outlook remains bullish.