The fear of a Currency Exchange War – Just another symptom of a wrong economic model?


The manager of the FED in USA, Ben Bernanke cranks up the money press to lower the value of the Dollar. This creates problems for Europe that sees a failire in demand of their products, partly due to the strong Euro.

FED boss, Ben Bernanke purchases state obligations for around 300 Billion USD, which is really going into unknown territories, and has unknown effects not only domestic but internationally.

Experts warns that he releases an international currency exchange war by doing this, where exporters will fight to lower their own currency in order to strengthen their export opportunities.

If the dollar will continue to weaken, it will create challenges for Europe and their export based industries. The demand for products produced in Europe is already downwardsa spiraling, and the effect of a strong Euro versus import countries currency values, will play another factor adding to this trend.

If the Dollar will continue to weaken towards the Euro, it will create a room for a currency exchange war.

As long as the Federal Reserves in USA makes the only government with major measures in their economy, the dollar will continue to weaken. At the moment other authorities will do the same as USA, we will be back to square one when it comes to the currencies.

The Euro strengthened at a nine year high rally when it was announced that the FED in USA would buy up 300 Billion USD worth of state bonds. There is still a trend in the market that the Euro strengthens towards the Dollar.

This is not good news in the Euro zone as it puts more pressure on the Central Bank of Europe and the need for the manager Jean-Claude Trichet, to make measures to protect its own industries and its economy. At the moment the Central bank of Europe is not making any drastic measures as Jean Claude Trichet has several times warned that the interest rate could become to low. Te Central Bank of Europe lowered the interest rate from 2 to 1.5% in March and the upcoming meeting in April 2nd will give signals to whether he wants the interest rate even lower to 1%. The FED in USA has by comparison a 0% interest policy ongoing to make impact into their economy. The difference between the European and US interest rate will probably become less as time goes by, as the European industry is facing major challenges at the moment, which will force the Central Bank of Europe to lower the interest even further.  The lack of action from the Central Bank of Europe is commented by several experts both inside the Euro zone as well as outside the zone. Most central banks around the globe is actively fighting the risk of deflation through purchase of state debt. And one question how long it will take before the Central Bank of Europe will need to do comparable measures to save the EU zone industry and economy. The currency market will also contribute to the pressure on the Central Bank of Europe to act and to perform measures in the EU zone economy.

Whether Central Bank of Europe will have to go down the same path as the FED in USA has gone remains to be seen, but some measures have to be taken in order to ensure the EU economy. Some countries have begun to sell their local currencies in order to deliberately weaken their currency to strengthen their export trade potential.  Switzerland is the therefore the first country that officially has gone to this measure, and thereby maybe the first country to show the willingness to go to a currency exchange war to protect their own interests.

The Euro zone industrial production numbers are downward spiraling with an annual decrease of almost 18% last year. This was much worse than expected, and puts a pressure on the Central Bank of Europe to handle this fact and to counter-measure this in some fashion or just let it be and see what happens. Maybe there are to many unknown variables in this game to do anything, and maybe this is the game of the Central Bank of Europe.

The weak first quarter of 2009 with a drop in BNP puts a pressure on the Central Bank of Europe to make a statement of some kind. Unicredit prognoses a drop of 1.7% for the rest of the year in the Euro zone and there are signals that the European industry is falling faster than the American industry does.

In these times where everybody are guessing on what effect any measure will have in the global economic picture, one can begin to wonder whether any established economic model will hold during these times? Is there are need to re-think the whole economic model for international trade to be able to create more predictability into the economy?
No one knows what effect the American government plan will have on their domestic nor the international economy, but lots of assumptions are made and based on this, a prediction on the effect is made. Maybe the Central Bank of Europe is handling this economic situation differently from the IUS FED, it maybe wrong, but there is also a chance it’s the right way they handle it too. We have not seen the answers yet, and I just wonder how many people will be sitting in 5 years time and say, I told you so, did I not?

Maybe its time to listen to the alternative economic model experts, and maybe they can provide us with some nutrition to this debate before its too late and we end up as in the recession of the 30’s

Source by Stig Kristoffersen

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