- Investment Specialist
Skip to main content
- Funds
- Insights
- Capabilities
- About Us
- My Account
United States, Institutional
Changechevron_rightThe views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
At time of writing, investors and market commentators are focused on the impact of (still) high inflation and subsequent monetary policy decisions on bond markets but they appear to have overlooked the potential consequences for currency risk. Yet, in our view, the new economic era we have entered entails not only more uncertainty and volatility in interest rates but also greater fluctuations in exchange rates. Hence, we believe understanding currency moves and how they impact economies can be an important asset in navigating increasingly volatile markets.
Currency intervention is a monetary policy action taken to moderate the pace or extent to which a currency appreciates or depreciates. This is done by changing the supply of the local currency and actively buying or selling foreign currencies at scale to reach the desired exchange rate. It is most often undertaken when the level of the local currency exchange rate is deemed to have moved out of alignment with underlying economic fundamentals. Policymakers buy or sell national reserves to stabilise the economy and control inflation by putting a stop to what is perceived to be excessive currency strengthening or weakening. While the line between currency intervention and manipulation can sometimes be blurred, large-scale interventions generally aim to address a broadly recognised imbalance in markets and often involve international cooperation or agreement. Occasionally, however, governments are accused of outright manipulation, attempting to unofficially distort the value of their currency to achieve a specific economic objective, most notably to (re)gain competitiveness in global markets and boost exports.
Lessons from the past
To be clear, intervention by policymakers to prop up or strategically devalue a currency is not new. As an example, in 1992, the UK withdrew sterling from the European Exchange Rate Mechanism (ERM) in a bid to stop speculative selling of the currency (an event known as “Black Wednesday”). At the time, the UK was slowly emerging from a steep recession caused by factors such as low competitiveness, high inflation and persistent current account deficits. However, policymakers kept interest rates high to prop up the value of sterling. When market participants became concerned that the currency’s exchange rate did not reflect these weaknesses, the monetary authorities responded with further rate hikes and then large-scale currency interventions. When these rate hikes and interventions became unsustainable, the UK abandoned the ERM, prompting a large-scale devaluation (Figure 1). While a brutal shock, it ultimately increased the UK’s competitiveness in global markets and spurred economic growth.
Similarly, other ERM currencies, most notably the Italian lira and Spanish peseta, went through various rounds of devaluations against the German mark, enabling them to maintain export competitiveness. And back in the 1980s, the G7 countries sought a strategic devaluation of the US dollar through coordinated efforts (the Plaza and Louvre Accords), with the aim of addressing major imbalances in the global economy.
Since the introduction of the euro, active currency intervention has mostly occurred in emerging markets, most notably in Argentina and Turkey. Among developed economies, the use of active currency management has been limited to Switzerland, as the safe-haven status of the Swiss franc has, at times, posed a risk for the Swiss economy and the effectiveness of its monetary policy.
However, intervention has become more frequent in the last two years. We have seen Japan’s Ministry of Finance step into markets with tens of billions of US dollars to shore up the value of the Japanese yen while the Chinese authorities appear to be allowing the renminbi to float more freely in global markets in an attempt to devalue the currency and improve competitiveness. There has even been speculation that some Trump advisers are in favour of including currency intervention in the US government’s economic toolkit, should the Republican Party regain control of the administration. While on the surface implausible, such a move would be bold and unprecedented in recent history.
The inevitable conclusion is that once a critical mass of countries engage in active currency manipulation, a sort of prisoner’s dilemma ensues: there is no advantage in not taking part. This has potentially significant implications for investors and allocators:
Experts
Bond Market Outlook
Continue readingMultiple authors
Capitalizing on rate shifts: Parsing opportunities in the second half
Continue readingIdeas for navigating a new era
Continue readingReframing fixed income portfolios: why bond maths makes the difference
Continue readingWeekly Market Update
Continue readingBy
June FOMC meeting: May disinflation is welcome, but is not enough for a rate cut
Continue readingHas the European credit cycle been extended?
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
You've been subscribed
Thank you for subscribing. You can manage your subscription using the links provided in any of our subscription emails.
Bond Market Outlook
Our fixed income experts assess how to capitalize on market volatility with a flexible and dynamic approach that leverages diverse high-yielding opportunities and manages risks carefully.
Multiple authors
Capitalizing on rate shifts: Parsing opportunities in the second half
Fixed Income Portfolio Manager Campe Goodman and Fixed Income Strategist Amar Reganti discuss how to capitalize on potential rate shifts in the second half of the year
Ideas for navigating a new era
Explore our latest views on risks and opportunities across the global capital markets.
Reframing fixed income portfolios: why bond maths makes the difference
It is easy to understand why fixed income investors tend to focus on yields. But investors who focus too much on yield may run the risk of overpaying for income and underestimating the impact of price volatility.
Weekly Market Update
What do you need to know about the markets this week? Tune in to Paul Skinner's weekly market update for the lowdown on where the markets are and what investors should keep their eye on this week.
By
June FOMC meeting: May disinflation is welcome, but is not enough for a rate cut
Fixed Income Analyst Caroline Casavant discusses what June's FOMC meeting tells us about the US Federal Reserve’s latest thinking on interest-rate cuts.
Has the European credit cycle been extended?
2024 has kept fixed income investors busy. Yet, despite lingering inflation and rate volatility, European credit markets have remained strong. Are we looking at an extended credit cycle? And if so, what does this mean for investors?
Governments have been slow to reduce their fiscal deficits — it could cost them
Our expert explores the investment implications of continued excessive deficit spending by G7 countries.
The revenge of the monetarists
Fixed Income Portfolio Manager Brij Khurana makes the case for a monetarist explanation for moderating inflation.
By
Thriving or surviving? The state of the US consumer and the economic implications
Macro Strategist Juhi Dhawan examines the condition of the all-important consumer, including the outlook for spending, the effects of inflation and prevailing interest rates, and the consequences for the overall economy.
Battle for the supply side of the economy: US election implications
Starkly different policy agendas from Biden and Trump are examined in terms of how they may affect the supply side of the US economy.
URL References
Related Insights
© Copyright 2024 Wellington Management Company LLP. All rights reserved. WELLINGTON MANAGEMENT ® is a registered service mark of Wellington Group Holdings LLP. For institutional or professional investors only.