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Currency wars will break out globally

Monday, February 9, 2015

Significance

Since the start of 2015, 16 central banks have loosened monetary policy, partly because of the fallout from the oil price plunge, which is driving down inflation. This 'race to the bottom' is increasing the scope for 'currency wars', endangering financial stability in countries with macroeconomic imbalances.

Impacts

  • A wave of monetary easing will drive government bond yields to new lows, increasing the scope for currency wars.
  • The race to the bottom is forcing many central banks to loosen policy to deter haven-seeking inflows of foreign capital.
  • This race will fuel speculative attacks against currencies, with Denmark's central bank struggling to defend its krone-euro peg.
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