Most global currencies have been declining against the US dollar, or looked at the other way around, the USD has been appreciating against most other global currencies. In light of the gains of the US dollar against virtually every other asset – bonds, stocks, gold, copper, and more recently even oil and gas – we could quibble that it’s much more of the latter than the former. But some of those other currencies have been notable losers. Due to the Bank of Japan’s insane attachment to negative yields across the Japanese government bond market, the Japanese yen has the poster child for abandoned currencies. Until last Friday that is … at which point the British pound stole this dubious spotlight.
I make no claim to expertise in currencies and bonds outside the United States, but this is what’s moving markets now and we don’t have the luxury of ignoring things just because they’re outside of our comfort zone. The same fundamental principles apply to currencies as any other securities though, so we won’t claim complete ignorance either.
Last week the incoming Prime Minister shocked the markets by announcing what amounts to a great expansion of UK debt, combining tax cuts and subsidies for energy bills. The notion of fighting energy price inflation by injecting more money into the demand side boggles the imagination. Of course the pounds required to pay for all this have to come from somewhere, and without any other obvious candidates the markets suspect that somewhere will be nowhere. The result was a plunge in the value of the British pound.
Today the Bank of England poured fuel on the fire by saying it will study the situation and consider responding at its next regularly scheduled policy meeting. Markets apparently having hoped for something more concrete again trashed the pound.
How this will improve the power of UK households to purchase energy or anything else isn’t clear.
These developments however affect investors everywhere, not just in the affected countries. Japan for instance has been dumping US Treasuries to fund a quixotic quest to buck up the yen to defend it from the actions of its own central bank. Since Treasuries serve as the benchmark to establish yields and consequently prices of virtually all the world’s assets, the only possible place investors could hide would be another planet. For the time being however, an ample allocation to US dollars and short term US Treasuries has been the preferred refuge.
While reader comments are always welcome, those from UK readers familiar with these developments and their context are especially so.