Currencies: A trillion here, a trillion there…

IF THE markets were suffering from withdrawal symptoms after the Fed’s halting of QE on Wednesday, they did not have to wait long for their next hit. This morning, the Bank of Japan today announced an increase in its annual target for expansion of the monetary base from ¥60-70 trillion to ¥80 trillion. Even at ¥110 to the dollar, that is still a chunky $700 billion a year increase (or about 2% of GDP). The aim is to get inflation higher; if the recent sales tax increase is excluded, core inflation is still running at 1%, too close to deflation for comfort.The decision, on a 5-4 vote, was a big surprise and pushed the Japanese market up sharply, with the Nikkei 225 hitting a seven-year high. European markets, already encouraged by Wall Street’s strength yesterday, have duly pushed higher.But perhaps the most interesting response has been in the currency markets, where the yen dropped more than 2% against the dollar, a big move by normal standards. There is now a genuine divergence between monetary policy in the developed economies. That creates a lot more scope for currency volatility than in the long years when virtually all banks had their feet on the monetary accelerator.The talk of currency wars a few years ago was focused on emerging markets, which felt the developed world was devaluing at their expense. In a sense, however, this was the right thing to happen; over …

Link to article: www.economist.com/blogs/buttonwood/2014/10/currencies?fsrc=rss

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