When Marvin Gaye gave us ‘What’s Going On’ back in 1971 who knew we would be asking the very same thing about the financial markets today.
Today we see that the Indian rupee has considerably weakened. The British pound (GBP) to Indian rupee (INR) has so far touched a high of 91.88 today. It hasn’t been that high for over ten years.This recent theme of the last few weeks that have concerned investors is the US Fed hinting of tapering their asset purchase place in the near future. This has affected not only the Indian rupee but the Australian dollar, the Mexican Peso and the South African Rand.
So what is going on…
In general among other things the central banks have been printing more currency and/or lowering interest rates. We have seen this with the USA, UK, Eurozone and Japan in particular. Since the currency world is all relative, the race is on to have the weakest currency.
A weaker currency means that goods and services will be more attractive to overseas buyers. By being cheaper the hope is that this will help stimulate the economy, allow exporters to flourish creating more demand and in turn more local jobs.
However, in the globally connected environment we live in today we often hear the phrase ‘beggar-thy-neighbour’, which according to Wikipedia is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.
Essentially, if one country weakens its currency, that will cause the exports of that country to go up, at the expense of all the other countries in the world, as long as that country is the only one that weakens its currency. But if ALL or many of the other countries do the same, then they have simply increased the probability of a bursting domestic bubble, turn away investors looking for high yields, stymie the plans of those who have fixed their exposure higher, and risk totally destroying the purchasing power of their own currency.
In ‘normal’ times when we hear of low interest rates and a weak currency the first thing to spring to mind would be Inflation so you might see now that Central banks are in a bit of a predicament. On the one hand we don’t want to get involved with inflation especially stoking it to become hyper-inflation and on the other to allow the economy to still function and hopefully thrive. However, on a more global level we end up in a gridlock of debt, an over-abundance of money, weaker productivity and an all-round malaise to doing anything.
So what can one do…
- Hedge your exposure from any one currency
- Be alert to which currency most exposure is and follow the currency trends
… and for those who just want to put their heads back in the ground! Here’s Marvin Gaye…