Investors Await BoE Policy Decision As Fears Over Global Currency War Grow

Published: Wednesday, 23 January 2013 09:00 BST - Written by Tim Boyer

STORY LINK Investors Await BoE Policy Decision As Fears Over Global Currency War Grow

Yesterday brought a strange day for global equities; in spite of positive news overnight from Japan, where the country’s new administration revealed that it is set to adopt an ultra-loose ‘go-for-growth’ economic policy, the world’s leading share indices struggled to break into positive territory. London’s FTSE 100 closed marginally down, losing 0.03% of its value on the day, while the broader-based FTSE 250 dipped by 0.28% on the session. Frankfurt’s benchmark Dax index gave up even more ground, edging lower by almost three quarters of a percentage point, while New York’s Dow Jones spent much of the day trading in negative territory.

A casual observer would have expected better from the world’s share markets, especially given the fact that last Friday’s Chinese GDP growth data revealed that the ‘workshop of the world’ showed an annualised economic expansion of almost 8% during the final three months of 2012. An improved outlook for the eurozone would also ordinarily point to improved appetite for risk in the markets.

The key to why risk sentiment appears to be flagging may be attributable to comments made by Alexei Ulyukayev, the First Deputy Chairman of the Central Bank of Russia during the middle part of last week. Ulyukayev posited that the global economy stands on the precipice of a potentially damaging currency war, stating that Japan was taking tangible actions aimed at actively weakening its currency. Ulyukayev’s observation was afforded additional weight following last night’s announcement in Japan that monetary policy would be loosened – an action which will cause the Yen to lose ground. Recent complaints by former eurogroup leader Jean-Claude Juncker that the euro was at ‘dangerously high levels’ added to the picture that the world’s policymakers are entering a perilous race to achieve the weakest currency in an attempt to hold the best terms of trade.

Looking forward to today’s session, it would be a major surprise if the Bank of England alters interest rates later today, however given the soft tone of recent UK data releases, an extension to Britain’s £375bn Quantitative Easing policy can not be ruled out. Such an occurrence could send the GBP EUR exchange rate tumbling towards a new near-term low at 1.1756.

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