FINANCE: World Currency Imbalance Affects Business, Investors
Small, medium and large business owners could all be affected by the currency wars that are bound to play out as foreign and domestic economies work out their fiscal policies.
If you are a business of one or a large corporation, the very form of tender you use with foreign clients will have a bearing on your bottom line. Likewise, investors will have a challenge seeking above-average returns due to currency imbalances as they have been able to do in the past.
Major trading countries are trying to depress the values of their currencies. If all the major trading partners continue to compete for devaluation, then no one can gain an advantage. This could ultimately be a war with only losers. Holding down or purposely devaluing currency will reduce the real value of money and ultimately produce price bubbles in commodities and other real assets¹.
Talk of currency wars escalated with Japan’s new prime minister explicitly stating his intentions to depress the yen’s foreign exchange value. Over a year ago, Switzerland began to intervene in foreign exchange markets as well. The Swiss franc had risen in response to the Eurozone’s fiscal crisis. Worried that the surge in the franc would hamstring the country’s export prospects, they announced a cap on the franc’s value.¹
Prior to the European crisis, Brazil accused the United States of manipulating the dollar’s value through the Federal Reserve’s quantitative easing policy.
This trend, even if it does not materialize into a war, does present an inflation risk. Price bubbles in commodities and other real assets affects consumers and businesses long before we feel the full wrath of an increase in the Consumer Price Index.
The easing policies world-wide have not materialized into a quick recovery for any country. In fact, Japan is still in recession along with Europe still dealing with the economic downturn from the fiscal crisis. Even China is growing at a much slower pace than in the past, as is India and much of the rest of the emerging countries.
All of these economic policies affect U.S. business owners, consumers and investors. How quickly full employment returns, how currency imbalances affect foreign trades, and how investors benefit from these anomalies are all yet to be determined. This is another chapter in the long book on global economic recovery amidst austerity, falling currency valuations and slow growth.
If you export goods or services to another country, invest in foreign assets or travel extensively, currency imbalances will continue to be more of a hurdle in the near future. Make certain you are properly calculating the exchange rates daily as foreign currencies are constantly shifting largely due to a forced and artificial valuation for political or economic purposes.
It may be awhile before world-wide currencies float effectively, hence taking away some of the benefits of lower valuations for travel, trade or investing. The closer we come to a world-wide economy, the less diversification there will be as most major countries are likely to be on the same business cycle at the same time.
1. Milton Ezrati, Senior Economist at Lord Abbett.
Patricia Kummer has been an independent Certified Financial Planner for 26 years and is President of Kummer Financial Strategies, Inc., a Registered Investment Advisor in Highlands Ranch, 3 year Top Wealth Manager 5280. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice.