After this week’s extraordinary turn of events regarding an unnamed official from the G7 explicitly labelling the yen’s recent decline as excessive, Japan has overtaken China as the enfant terrible of the FX world. Officials from Tokyo should brace themselves for a dressing down at this week’s G20.
After falling more than 7% against its G10 counter-parts, the yen has had a good run. However, the sharp decline in the yen may mean that Japan has won the battle but ultimately lost the currency war now that it has come to the attention of the world’s most powerful central bankers.
As the yen retreats from the front lines of the currency war, the pound could be its natural successor. Sterling is the second worst performer in the G10 currency bloc so far this year, falling more than 4% since January. Interestingly, while the Japanese launched a huge (and expensive) joint government and central bank effort to weaken the yen, UK officials haven’t had to spend a penny trying to bring down the pound.
A weaker currency is good for the UK – it could help ailing exporters and make foreign investment into the country better value. Thus, the UK has managed to get what it wants – a weaker currency – without shouting about it and drawing attention to itself.
This is important in the current environment of hyper-vigilance of FX markets. The Swedish authorities, who not long ago were bemoaning the strength of the krona, changed their tune at this week’s Riksbank meeting, potentially to avoid a diplomatic showdown in Moscow later this week.
Mervyn King and the BOE didn’t have to mention the currency when they presented the February Inflation Report this week, yet the pound dropped by nearly 1% in a matter of minutes.
Can the UK manage to stay below the G7’s radar? People might be selling the pound because the UK economy is looking pathetic and even the euro zone seems like a better investment right now, but it could have the last laugh in this much-hyped currency war.
Kathleen Brooks is author of the forthcoming book Kathleen Brooks on Forex, published by Harriman House.
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