Sterling fell to its lowest level in at least six months as investors continue to take down currencies around the world amid aggressive central bank action aimed at reviving economic growth.
Finance ministers from the twenty largest economies are expected to tackle the issue of sharp currency moves when they meet this Friday in Moscow after an earlier communique from G-7 central bankers and finance ministers attempted to reaffirm market-based exchange rates but failed to cool currency-weakening rhetoric that could give some economies an unfair advantage in export markets.
"We are in a currency war," said HSBC strategist David Bloom in a client note. "Japan's efforts to weaken its currency have been a high profile development in this war, but far from first or the only one. Many nations have been cutting rates and embarking on nonconventional easing to help revive activity, and currency weakness was always a likely side-effect, whether intended or not, of such action."
HSBC scored 36 differnent developed and emerging market currencies on the basis of their central bank's ability and desire to use low interest rates, direct intervention, quantitative easing or capital controls to influence their value. Just under half of the sample - 14 - were deeemed "most active" in the bank's currency war spectrum.
The yen has fallen more than 15 percent against the US dollar since early November when Shinzo Abe, then campaigning for a return to the role of Prime Minister, began outlining his desire for the Bank of Japan to pursue a significantly faster target for inflation and looser monetary policy to ignite growth, create jobs and reverse the two decades of deflation that have sapped demand in the world's third-largest economy.
The pound slid to $1.5493 against the greenback, below $1.55 for the first time since August of last year, according to foreign exchange data on Reuters.
The move followed Bank of England governor Mervyn King's quarterly inflation report and press briefing in told reporters that while inflation was likely to remain well above the Bank's preferred target until at least 2016, the overall economy was simply too weak to allow him to raise interest rate to fight it.
"You might be tempted to think that an above-target inflation forecast justifies a tighter monetary policy, and certainly ensuring that inflation returns to target in the medium term is our primary responsibility and objective," said the outgoing Governor. "But the MPC's remit is to deliver price stability in the medium term in a way that avoids undesirable volatility in output in the short run. The prospect of a further prolonged period of above target inflation must therefore be considered alongside the weakness of the real economy."
King's comments reflect a new - and potentially dangerous - central banking strategy that relies on communication and verbal intervention rather tangible action. He appears reluctant to increase the currenct £375bn programme of quantitative easing and is even less likely to lower the Bank rate from its current record low of 0.5 percent.
"His recent pronouncements suggest that he sees much more room for monetary policy impact, perhaps more through communication that QE, though," said Societe Generale economist Brian Hilliard. "The big question is 'will things change when (new BoE Governor Mark) Carney arrives?'".
Last week, European Central Bank President Mario Draghi addressed the issue of the single currency's recent strength with the veiled suggestion that he might be ready to lower the ECB's key refinancing rate to prevent further appreciation if inflation risks were to skew to the downside.
The talk helped but a cap on the single currency's gains and once again reminded investors of the power of central bank rhetoric. HSBC's Bloom says this is one of the three main tactics central bankers can use in their effort to implicitly target exchange rates.
"Central banks or governments express concerns over a currency's high value, lower interest rates to diminish its yield appeal, or sell their currency directly to the FX market to lower its value," he wrote. "In many instances, these tools are still used."
With that in mind, the G-7 communique sought to "reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets."
"We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates."
Within minutes of the statement, Japan's finance minister, Taro Aso, told reporters in Tokyo that the statement "properly recognises that steps we are taking to beat deflation are not aimed at influencing currency markets."
An unnamed G7 official told Reuters that the statement was misinterpreted and had in fact "signalled concern about excess moves in the yen and (it's) concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend."
Swiss National Bank chief Thomas Jordan was equally dismissive of the G7's attempt to cool the currency market rhetoric, telling a news conference in Geneva that "the Swiss cap remains the adequate instrument to guarantee price stability. The reasons for introducing it remain valid. We do not exclude any measures in case it's necessary to have adequate monetary conditions in Switzerland."
The Bank imposed a 1.20 cap on the Swiss franc against the euro in September 2011 to prevent deflation and a possible recession as investors piled into the safe-haven currency at the peak of the European sovereign debt crisis.
"Experience of politically motivated depreciations in the past has shown that these generally do not lead to any lasting gains in competitiveness," said Bundesbank President and ECB Governing Council Member Jens Weidmann in a speech delivered Wednesday in Freiburg. "Often, renewed depreciations are necessary. If more and more countries try to depress their own currency, this can culminate in competitive devaluation, which will only produce losers."
Others, including former Swiss Bank Chairman Philip Hildebrand, are sceptical of the idea that polices are designed to deliver an export edge.
"There is no such thing as a currency war," he wrote in Tuesday's Financial Times. "This is because central banks are simply doing what they are meant to do and what they have always done. They set monetary policy consistent with their domestic mandates. All that has changed since the crisis is that central banks have had to resort to unconventional measures in an effort to revive wounded economies."
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