Currency wars threaten Lehman-style crisis

Saturday, March 14, 2015
By Paul Martin

Inside the new European Central Bank headquarters in Frankfurt. Central bankers are increasing the chances of another Lehman-style crisis

By Liam Halligan
TelegraphUK
14 Mar 2015

Global currency markets made front-page headlines last week as the euro plunged towards parity with a surging dollar and the pound similarly soared against the single currency.

But why is the dollar so buoyant and the euro spiralling downward? And should you lock in the strong pound by buying your summer holiday money now?
You may, quite reasonably, think that economic fundamentals, such as GDP growth and cross-border trade flows, still drive exchange rates.

Unfortunately, though, you’d be wrong. For we live in the age of “extraordinary monetary measures” and “central bank diktat”.

That may sound like a remote, jargon-laced statement, the musings of a nerdy economist. I’d say, in response, that the recent actions of Western central bankers are provoking not only heightened market volatility, but also increasing international conflict and the looming prospect of another Lehman-style systemic lurch. The dangers, sadly, are very real.

Currency dealers, and the ubiquitous computerised trading robots, are influenced far less these days by growth or inflation forecasts than by the market’s view on the origin of the next splurge of quantitative easing.

That judgment is driven, in turn, by the coded missives of central bankers like the US Federal Reserve’s Janet Yellen, Mark Carney at the Bank of England and, particularly in recent months, Mario Draghi at the European Central Bank (ECB).

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