Currency Impact of Central Banks

09/24/2014 12:01 am EST


Jim Jubak

Founder and Editor,

As some central banks still stimulate their economies, the Fed is on a different course, which MoneyShow's Jim Jubak thinks may have an impact on the currency markets.

Central banks, can't live with them, can't live without them. What we've really got is sort of two stories, there's the, “we're going to keep printing money because we've got to stimulate our economy” story, and in that group we've got the European Central Bank, we've got the Peoples Bank of China, which has recently joined the group, and we've got the Bank of Japan. On the other hand, we've really only got one bank, a big one, the US Federal Reserve, which is starting to, if not reduce its balance sheet, at least not grow it as fast. It's cutting back so that its asset buying program looks like it's going to end in October, so we're seeing these two groups move in opposite directions, which has really interesting implications for things like currencies, US interest rates, the dollar, and US economic growth.

What we're really seeing is a stronger dollar, which will indeed take a little bit of a bite out of US economic growth. What we're seeing is, however, that that stronger dollar is acting to depress US interest rates, which gives a little bit more bounce the US economy, and the question is whether we're going to see any really negative effects out of this. The place to watch is emerging markets, particularly countries that run a pretty big deficit on the current account, Brazil, India are two examples, Turkey. If those countries start to see cash flow moving too heavily to the United States, and see their currencies start to fall, that would be really good for domestic economies, bad for things like inflation, bad for economic growth, potentially bad for their currencies.

So what are we going to see as a result of this sort of bifurcation of the central bank world and the Fed's, sort of, isolated stance but very important stance as the one central bank that is not, at the moment, printing money hand over fist.

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