As an anxious world awaits President Obama’s State of The Union address, a bitter game of cat and mouse seems to be circulating global currency markets. At the center of the controversy is Japan’s yen causing the Group of Seven nations to call for cessation of devaluing of currencies to gain trade advantages.
Of late, currency markets have been volatile. As the USD has given ground to the euro, the euro has also soared against the yen. The euro has gained 24 percent against the yen in just three months. China has long been accused of manipulating its currency and international tensions are high.
Mario Draghi of the ECB spoke on Tuesday saying that exchange rates are equally important for growth and stability. Japan has implemented a large quantitative easing initiative that has lowered the US policy of continuing assistance from the Federal Reserve have kept the two currencies at low levels.
The US has made headway in its trade balance in the past two months with December closing the imbalance to its lowest level since the mid 1990’s. China also rode a strong export balance to its main buyers the US and Europe to a big spike in its January GDP.
Draghi said that he believes Spain is “on the right track” towards economic recovery. Meanwhile, Italy captured a significant windfall from its 2012 property tax enforcement. Italy collected 23.7 billion euros in property taxes, surpassing Treasury’s estimate by 1.2 billion euros.
It is expected that the windfall will be used to reduce the nation’s budget deficit below 3 percent of 2012 GDP. The target was 2.6 percent but analysts think that bar will not be achieved even with the windfall. The 2012 annual review will be published on march 1, 2013.
The US, Britain, France, Germany, Japan, Canada and Italy, the member nations of the G-7, was called to consider Tokyo’s expansive monetary policy. Reuters quoted a spokesperson for the G-7 as saying; “The G7 statement signaled concern about excess moves in the yen. The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”
The G20 finance ministers are scheduled to convene in Moscow this weekend. It is a full plate this time around and currency valuations will be at the fore.
Britain heads the G-8 which includes the G-7 nations and Russia and released a statement saying that as far as Britain’s easing and restructuring: “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” This is the intent of easing to assist national economies meet oppressive challenges.
Japan’s Finance Minister, Taro Aso, insists that the country’s policy is aimed at reviving the stagnant economy. It is unclear what leverage the G-20 has to stabilize the disparities.
Japan gained support for the US when Treasury official Lael Brainard told the media that the US recognized Tokyo as easing efforts as a remedy for the lackluster economy with massive unemployment.
Regarding the euro, France has been most vocal about setting a large for the currency that does not yield a competitive edge. Many euro members have concerns about the exchange rate but Germany lowered the anchor on such speculation. Finance minister Wolfgang Schaeuble said, “There’s no foreign exchange problem in Europe. There are concerns that there could be something like this in other parts of the world.”
Since December 2012, the euro has climbed 10 cents against the USD. This is the effect of the ECB tightening its balance sheet while Japan and the US continue to expand their easing programs.
Analysts hope that the President’s State of the Union will pave the way for a political compromise to reduce the deficit in reasonable terms and engage the public sector in a powerful growth initiative.
Forex Trading Articles by Forex Blog & Online Forex Trading