The global currency battle has deepened yet again as countries push forward with efforts to resist capital inflows that increase their currencies and undercut the competitiveness of their exports.
Thailand imposed a 15% withholding tax on capital gains and interest income from foreign investment in government debt in a bid to curb the Thai baht. The baht has risen to its highest point since the 1997 Asian financial crisis.
The People’s Bank of China has slowed the rise of the Chinese yuan by setting a weaker mid-point reference rate for yesterday’s trading. China insists that the yuan must rise gradually, despite pressure by world leaders.
Last week Brazil doubled a tax on foreign portfolio investments into bonds and other financial instruments to 4%, in order to reduce upward pressure on the Brazilian real.
Japan’s cabinet on Friday approved 5.05 trillion yen ($62 billion) in new economic stimulus to help the country’s competitiveness due to the rising Japanese yen. This came after it had reverted back to a zero interest rate policy.
Bank of England’s David Miles stated “We do have a policy tool, quantitative easing, which remains a potentially powerful tool and one that we might come to use” as Britain also faces competitive pressures.
Countries are also trying to protect their economy from the US Federal Reserve’s stimulus measures, including Obama’s latest $30 billion small business lending bill. The US has been steadily pushing the US dollar lower against foreign currencies.
The growing currency battle will add to economic uncertainty and instability. We can expect countries to continue adopting more protectionist measures via currency manipulation, but also in taxes/tariffs and other methods. In the end no national will win without cooperation. The longer this continues the further the economies will continue spiraling down, rather than recovering as fast as possible. However, no country is willing to bear any short term economic hardship.
We can expect the stock markets to respond in a very erratic manner as investors will react with uncertainty and without confidence. Whenever there is uncertainty in the stock markets (or any market), there will likely be opportunities. This will also increase investor appetite and demand for gold, and gold related investments in the long term.
Investment & Economic Outlook 2010