Most global trade is denominated in US dollars. Many assets are valued in US dollars. So the recent decision by the US Federal Reserve for a policy of “quantitative easing” has been getting a lot of attention. “Quantitative easing” means printing more money, therefore technically devaluing the US dollar by volume. For sectors as diverse as the Chinese export markets and the debt collection industry, whatever the US dollar does will have to be watched closely.
Forex markets in particular have been very nervous recently, because the possible change in relationships between currencies and the US dollar has very widespread ramifications for the forex markets. The change in relative currency values is quite likely to trigger a range of effects on international trade, which will carry through directly to currency and asset values.
The US dollar is the de facto world currency, and a common medium of exchange in third-party trades. Because asset values are denominated in US dollars relative to the currencies of the trading parties, it’s technically possible to lose quite a lot of money as the value of the US dollar shifts. If it shifts downwards, the relative value of goods compared to the national currency of the parties is reduced. That means the value and profitability of trade is reduced, and effectively acts as both a form of inflation and deflation.
This US dollar downward move acts as inflation by pushing up the relative cost of national exports, and as deflation by reducing the relative value of goods, services and assets denominated in US dollars. That’s one of the reasons for the howls of protest around the world at the Federal Reserve’s current policy. Germany called the policy “clueless”, based on the likely effect of a downward dollar move relative to the Euro.
China, which has been having ongoing war of words with the US regarding the value of its own currency, which is notionally pegged to the US dollar, believes that devaluing the dollar will have a negative effect on global trade. That’s particularly strong criticism, coming from China. Standard Chinese business and economic planning procedure is to monitor profitability of exports very closely. It’s not exactly an uninformed opinion.
Ramifications for global trade
The United States believes that “quantitative easing” will improve the competitiveness of its exports and maintain US dollar values of goods, assets and services within the US. Whatever the merits of this argument, it is quite likely that global trade will be affected, and that forex markets will have to deal with significant currency value fluctuations.
Hedging remains the best option for forex traders to retain their own profitability. However, the situation is occurring within the worst global recession since the Great Depression. A range of other economic crises like the European debt crisis can also impact severely on forex markets.
It’s likely that arrange a range of currencies will come into vogue as the US dollar eases. The Japanese yen, the Australian dollar, the Canadian dollar and other “risk neutral” currencies are quite likely to become preferred forex holdings. These are relatively stable currencies linked to fiscally strong economies.