The realignment of currencies in the past 18 months has been the most dramatic in decades. A perfect storm is occurring: Federal Reserve tightening; Eurozone and Asian monetary easing; and a collapse of major commodities, all conspire to drive just about every currency in the world to lower values against the USD. Governments are anticipating that this re-alignment will revive economic growth, led by the external sector. How likely is to happen?
Two recent studies, from the IMF and OECD, draw attention to the question of how effective are devaluations in changing the fortunes of “open” economies. The term “open” refers to those economies which generate a significant portion of national income from exports, such as Germany, Canada and several Asian economies. Before reporting on the studies, it is helpful to get a sense of the reasons behind devaluations, the extent of currency adjustments and the importance of exports to major trading nations.
Table 1 groups these devaluations by size and by importance as measured by the contribution of exports to national income.
* Depreciation in excess of 25% The greatest depreciations have happened in those countries that are highly dependent on commodity exports, — Russia, Canada, Australia and South Africa. The worldwide collapse of major commodities resulted in significant declines in their respective trade accounts and national income. Commodity markets are over-supplied and these currencies are not expected to recover anytime soon. The big concern is when will the commodity cycle reach bottom and for how long will it remain there.
*Depreciations of 20-25% . This group includes both manufacturing exporters
(e.g. Germany) and natural resource exporters (e.g. Sweden). The European currencies have adjusted downward in part a reflection of the EU debt crisis and domestic deflation.
* Depreciations of 10-20% This group includes highly industrialized countries such as Japan and the UK , countries that have benefited from lower commodity prices, and…
* Depreciations of less than 10%. The final group features emerging economies, ( eg China, India)that convert imported raw materials into intermediate and final goods for export.
No major trading country escaped the surge in the USD last year, a condition that carried forward into 2016, especially in the wake of further declines in oil and other major commodities.
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