Financial Stimulus on Exchange Rates Tag Archive

The topic of this week has been government intervention to influence the direction of their economies and has given good examples of the different methods at play.

Firstly the Chinese governments attempt to strengthen their own currency by using their huge reserves to buy up the yuan to keep up the price. However the adverse impact of this is high inflation, which would impact domestic wages, which then would effect exports, which would eat into their reserves. So a delicate balancing act.

Then there is Europe who, despite several other economies showings signs of solid growth are bouncing along the bottom and the European Central Bank are considering loosening the taps of economic stimulus to try to boost growth and ward off deflation. Considering their interest rates are already at a rock bottom at .025% there is little movement there, so their only recourse left is government investment or printing money. Having a centralised Bank but not a centralised government means that the ECB’s arsenal is limited to financial tricky rather than large scale capital injections into the economy like new roads or railways. The GPB has strengthened 0.8% against the Euro in the past week. (1.4% on the month)

Finally at the other end of the spectrum is the US where they have been living and free with financial stimulus for years now and are facing the prospect of going cold turkey, which is worrying a few that the economy is not strong enough and that any weaknesses would soon be exposed by any financial stress. The GPB has strengthened 0.8% against the Dollar in the past week.