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Hardy Hewson

Exclusive: China ready to cut rates again on fears of deflation - sources - 6 views

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    Credit: Reuters This article concerns the apparent policy decision facing China as to whether it should cut interest rates and loosen lending so as to decrease the deflation in Chinese growth. Historically China has artificially manufactured low exchange rates so as to benefit their exports to other countries. This new policy therefore represents a step away from this traditional approach.
Haydn W

The return of the US dollar | Mohamed El-Erian | Business | theguardian.com - 4 views

  • The return of the US dollar The resurgence of the US currency could be the first promising step in steering the world economy away from crisis
  • The US dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen.
  • Two major factors are currently working in the dollar’s favour
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  • Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one.
  • First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.
  • With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalysing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan.
  • ECB President Mario Draghi signalled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion).
  • Furthermore, sudden large currency moves tend to translate into financial-market instability.
  • There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.
  • Today, many of these countries have adopted more flexible exchange-rate regimes, and quite a few retain adequate reserve holdings.
  • an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets
  • But a new issue risks bringing about a similarly problematic outcome: By repeatedly repressing financial-market volatility over the last few years, central-bank policies have inadvertently encouraged excessive risk-taking, which has pushed many financial-asset prices higher than economic fundamentals warrant.
  • This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components. But the only way to take advantage of the re-alignment’s benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth-enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.
  • The US dollar’s resurgence, while promising, is only a first step. It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery. Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.
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    This article details the so called resurgence of the US dollar, in terms of currency value. The currency itself has risen by around 7% against other currencies but Guardian economist Mohamed El-Erian warns that without the appropriate accompanying central bank policies, the rise of the dollar could cause further market volatility and at worst a new crash. El-Erian calls for governments to enact policy to support balance the current currency realignment. 
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