With 15 central banks cutting interest rates this year alone, the world is in the midst of a currency war that has seen the dollar reach multi-year highs against a range of currencies in recent weeks.
This has sparked volatility that can continue to roil financial markets worldwide. "At this point, FX volatility has become the prime driver in global volatility," says David Woo, head of global currency research at Bank of America Merrill Lynch, according to
CNBC.
Indeed, according to BofA's calculations, currency volatility has hit a 20-year high for non-crisis periods. "You cannot make any investment decisions without actually understanding which way the dollar is heading," Woo says.
So the currency war rages on. "If everyone's playing this game you have no choice but to play it, because otherwise you get left behind," he explains. "We call it war because it's a zero sum game. Somebody wins, and somebody else loses."
The dollar will likely continue to rise as the European Central Bank and Bank of Japan pursue major stimulus programs.
"If China decides to play the same game, it will be a disaster because commodity prices are going to crash because China consumes 40 percent of the world's basic commodities," Woo explains.
"And then you're going to trigger a competitive devaluation around the world. The 10-year yield is going to go to 1.25 percent if China wants to devalue [its currency] 10 percent."
Others agree. "This is a multi-year dollar rally, and we're at the start of it," Stephen Jen, co-founder of investment firm SLJ Macro Partners, tells
The Wall Street Journal.
So the war probably won't end soon.
"These problems [of sluggish economic growth] have expressed themselves in a reliance in countries either maintaining cheap currencies or allowing them to depreciate," George Magnus, former chief economist at UBS, tells
The Journal.
"This is a phenomenon that will likely stay with us for some time."
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