Weekly Economic Briefing

A phoney war

25 November 2014

Global Overview

  • There has been increasing speculation that we are entering a new era of currency wars. A number of currencies have depreciated against the dollar, although these moves have not been unusual from a historical perspective.
  • We believe that the currency moves are primarily the by-product of policymakers’ efforts to stimulate domestic demand and inflation rather than attempts to engineer competitive devaluations to steal market share.
  • Japan and Europe are both suffering from insufficient domestic demand. Central bank balance sheet expansion should support local activity and inflation expectations, with the exchange rate channel providing additional support.
  • The impact of the dollar appreciation seen thus far on US growth and inflation is expected to be modest, with the pass-through of exchange rate moves muted. However, a much larger appreciation would have an impact on Fed policy.
  • China’s unexpected interest rate cut reflects a reaction to deteriorating domestic fundamentals rather than a riposte to currency moves. It will want to avoid currency devaluation to prevent capital outflows.


The US dollar has appreciated against a basket of currencies, although this is not expected to have a large impact on inflation and growth. Larger currency shifts would be more problematic.



A large and persistent correction in sterling has done little to rebalance the UK economy. Despite this, the Bank of England is likely to push against any marked appreciation in sterling.



The recent depreciation in the euro should help support net exports and import prices. While this is positive, the ECB should focus its policy efforts on stimulating domestic demand.



Policy action has pushed the yen into freefall. While the nation’s trade account may finally be reaping some of the benefits from this currency weakness, this is not the end-game for the Bank of Japan.


Emerging Markets

China’s interest rate cut was a reaction to weak domestic demand, high borrowing costs and deflationary pressures. China will likely avoid engaging in currency devaluation to prevent capital outflows.


Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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