Global Currency Meltdown
By: John Browne
Senior Market Strategist, Euro Pacific
Friday, 15 October 2010
As the recession and resultant stimulus packages add to higher unemployment and increasing public-sector deficits, the government is seeking to boost the value of overseas earnings that are accrued by US corporations. To aid in this effort, the Fed is being pressured to erode the value of the US dollar, thereby making foreign sales more lucrative in nominal terms. But this form of stealth protectionism will fail just as surely as more overt trade barriers.
Like all commodities, the relative value of currencies is influenced by reward, risk, and future expectations.
The interest rate earned by holding a particular currency represents the ‘reward’ end of the equation. Assuming similar risk profiles, money tends to flow towards the currencies with higher interest rates.