DEPENDING on who you listen to, the world is engaged in a global currency war. Alter-natively, we are seeing the buying and holding of US dollars as a normal return to the safe haven, and the approval of the dollar as the global economy’s reserve currency.
Either way, the value of the dollar against the other major currencies, as measured by the US Dollar Index (USDX), is at the highest level since 2003. The USDX reached a high of 120 in 2001, and a low of 72 in 2008. It is currently trading at around 96, coming higher from its recent lows in both 2013 and 2014 at around 79.
The fact that the major global currencies are falling against the dollar is probably not so much of a war, but a battle for economic survival. After several years of the central banks—led by the US—pumping literally trillions of dollars into the global economy, nothing much productive has occurred.
The policy of the US was for the Federal Reserve to buy US government debt and, thereby, free the banks’ capability to loan to the private sector. At the same time, interest rates all over the world were cut to near zero to encourage lending. But the banks did not loan and borrowers—primarily corporations—did not expand their businesses, but only inflated the price of their stock shares. The US stock market is up 122 percent, while the economy has only grown by 18 percent since 2009.
Now both Europe and Japan are on course to print their own currencies.
The last-ditch effort to increase economic activity is devaluing home currencies. Since the beginning of 2015, 21 countries have lowered their interest rates in such diverse economies as Romania, Canada, Japan and India. This was done hoping to increase export income and stimulate economic growth.
But to counter the effects of increasing inflation, the Bangko Sentral ng Pilipinas (BSP) raised local interest rates. The BSP could make this wise move, because the Philippine economy is growing. Unlike the other nations, the Philippines does not need a weaker peso. A stable peso is more important. Even with the dollar’s increase in value, the Philippine peso has maintained both value and stability without the BSP interference. The financial markets like owning the peso, because deposit rates are more attractive here than abroad.
The stability of the peso since June 2014, appreciating only about 6 percent, even as the dollar has appreciated 18 percent, shows the success of the policy moves the BSP has taken in the last 12 months.
As long as inflation stays contained, money-supply growth is reasonable and the peso remains stable, our “bromance” with the BSP will continue.
Image credits: Jimbo Albano