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The Currency Nanny State: Interventions Have No End in Sight

By Andrew Packer
Friday, 12 Aug 2011 08:14 AM Current | Bio | Archive

Suffering from insomnia? Put your restless mind to work by trading the currency markets. If the stress doesn’t tire you out, nothing will.

It’s a strategy a friend of mine did for a few months back during the financial crisis. Over morning coffee, he’d regale me with his fast-paced, highly-leveraged trades from the night before.

“So I was up nearly $5,000 at that point, but it pulled back a bit. Still, there’s something about making $2,000 at 3 in the morning.”

Today, currency investors need to worry a lot more about possible margin calls. That’s because central banks are embarking on policies to change the value of their currencies in order to keep their economies afloat.

In some cases, countries are going the route of the United States with loose monetary policies. The Fed’s two rounds of quantitative easing drove down the value of the dollar by nearly 20 percent. In return, this kept prices on stocks and commodities from falling.

Other countries don’t have the world’s reserve currency, but can still resort to similar measures. Japan’s central bank has stepped in several times in recent months to weaken the strengthening yen.

Rumors abound that the Swiss National Bank is planning to peg the Swiss franc to the euro. Doing so would allow the small country to stabilize its currency relative to its biggest trading partner. The rising franc versus the euro has occurred on the perception that the franc is a “safe haven” currency.

Ironically, a rising franc hurts Swiss exports, lowering growth in Switzerland.

In all three cases, countries are trying to weaken their currencies relative to the currencies of other countries. This approach was also used during the Great Depression, going under the name “beggar thy neighbor.” After all, a weak currency makes your country’s goods and services appear cheaper to consumers in another country.

Ultimately, these quick “fixes” are short lived. Japan’s last intervention managed to last a whole four days. Why? Because at the end of the day, the economy is about real goods and services being created and used, not about the supply of money in creation or its short-term fluctuations.

Unfortunately, central bank interventions can wreak havoc on currency trades. That doesn’t mean investors should shun all currency trades.

Investors should still diversify their wealth into several currencies for diversification purposes, but it doesn’t have to involve leveraged trades. This can be done with foreign bonds, a variety of unleveraged currency ETFs, and international stocks headquartered outside the United States.

And, of course, investors who want to avoid the entire mess of fiat currencies have the choice to hold gold and silver. They should continue to perform well over the next few years ahead as governments rush to devalue their currencies.

Next time you can’t seem to get some sleep, don’t fire up your computer and check out the currency markets. Just try to get some sleep instead.

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AndrewPacker
Suffering from insomnia? Put your restless mind to work by trading the currency markets. If the stress doesn t tire you out, nothing will. It s a strategy a friend of mine did for a few months back during the financial crisis. Over morning coffee, he d regale me with his...
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