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Exchange Rates 19.07.2019 analysis

According to some analysts, the global financial market is on the verge of or is already experiencing a new phase of currency wars.

"Now, interest rates are at historic lows, so central banks can no longer influence the cost of borrowing in the usual way. The only way to further ease monetary policy for them is to weaken their national currencies. Thus, we are already in a state of currency war, although no one officially recognizes this," said Thanos Vamvakidis from Bank of America Merrill Lynch.

Market participants are now discussing whether a hidden currency war will result in an open confrontation, and they do not rule out that US President Donald Trump may begin with it.

If the head of the White House has already organized a trade war, then why not launch a new round of currency?

It is assumed that if the US currency (and, according to the IMF, it is overestimated by 6-12%), contrary to expectations of a weakening of monetary policy, the Fed will continue to strengthen, the likelihood of increased pressure on the Treasury and the Central Bank from the US President will only increase. Currency intervention can serve as a "medicine" for a greenback that is too presumptuous from the point of view of Washington.

Over the past twenty-five years, the United States has intervened three times in the life of Forex (in 1998, 2000 and 2011), and all three times the US Treasury Department and the Fed have acted together.

If the Fed now agreed to take part in this, the budget of the US administration for the purchase of other currencies would be about $ 200 billion.

However, the Central Bank, who wants to emphasize its independence, may abandon the idea of a large-scale sale of dollars this time.

"If the Ministry of Finance decides to act alone, then this step could lead to an institutional crisis," said Deutsche Bank.

In addition, there is one caveat - before, leading central banks coordinated actions to weaken the dollar. Will the United States be able to get broad support now? Hardly, and without it, the results of currency intervention will be questionable.

Moreover, Washington's unilateral attempts to weaken the dollar could provoke other countries to fight interventions, which would increase the likelihood of a mirror competitive devaluation.

"This will lead to a real currency war, which is likely to go between the dollar and the yuan, as well as between the euro and the dollar," said Deutsche Bank strategist Alan Ruskin.

Performed by V Isakov,
Analytical expert
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