Question of the week: Is a post-COVID currency war coming?

Financial markets’ euphoric response to the recent COVID-19 vaccine discoveries and U.S. election results pushes some currencies up so fast that debates have begun about a possible new FX war.

Almost ten years after Brazil’s finance minister likened Western central bank money-printing to financial warfare, some of the circumstances that led nations to weaken their currencies then look to be forming again.

Investors’ growing enthusiasm to buy into risky assets gave developing market currencies their best month in nearly two years in November, extending a run of gains that started in June.

A further extension — seen as possible after the dollar hit a two-year low on Thursday — would mark be their longest consecutive climb since 2012.

Taiwan, South Korea, and Thailand are already concerned enough to either negotiate in their foreign exchange markets or take other steps to prevent weak economic recoveries being snuffed out.

In Sweden, whose crown is this year’s best-performing currency, the central bank suddenly increased its money-printing program last week.

Economists blame competitive currency devaluations for exacerbating the 1930s Great Depression and hauling for decades on world trade by fostering protectionism.

The cycle usually begins with tit-for-tat interest rate cuts and interruptions. It can still quickly intensify into capital controls or investment taxes to ward off hot foreign money like flooding into emerging markets.

On Thursday, Institute of International Finance data showed investors splurged a single $40 billion on stocks and $37 billion on bonds in developing markets last month, a spree that was more than the previous three months combined.

South African rand, Mexican peso, Brazilian real, Turkish Lira, Russian rouble and Polish zloty all jumped between 5% and 10%, adding to 5%-12% leaps in Taiwan, Korea and China’s currencies since June.

It is not only the expectation that COVID-19 vaccines will normalize commodity prices driving the trend., trade, and travel.

Low global interest rates mean developing countries are among the few places left where investors make real returns on bonds. Simultaneously, the boom in electric cars and automation has seen money pour into Asia’s big microchip makers.

Global trade is expected to see the first development next year in three years, hoping that U.S. President-elect Joe Biden’s government will be more predictable on that front.

“If you look at the areas in which potential currency wars could break out it would be the areas which have attracted the most capital flows or the most equity flows,” PIMCO’s head of emerging markets portfolio management Pramol Dhawan said.

He cited Taiwan, South Korea and China as the main hotspots, and potentially India going forward. It has already stacked up $85 billion worth of dollar reserves this year, Narain at UBS added, helping keep the rupee on the leash.


When Brazil’s Guido Mantega declared a currency war had broken out in September 2010, the dollar had lost more than 10% in around three months. And it didn’t stop there, falling 17% by June 2011.

This time around the greenback is down 11% in eight months. But U.S. investment bank Morgan Stanley thinks it is still 10% overvalued and Citi forecasts a record 20% drop next year as economies recover and the Federal Reserve continues stimulus.

IIF chief economist Robin Brooks doubts even that kind of move would trigger a full-blown currency war.

Taking away the 8% leap in China’s yuan, EM currencies are still down 5% this year, and some of the hardest hit, like Brazil’s real and Turkey’s lira, are down 25% and worth a fraction of what they were a decade ago.

“Honestly, if I were an EM policymaker, every day where my currency was strengthening, I would be happy,” Brooks said, noting that a more powerful currency also makes it cheaper to repay the dollar-denominated debt that has been piling up.

Nevertheless, he thinks the euro and the yen will be shoved higher, requiring the European Central Bank and Bank of Japan to respond. China’s reaction will also be watched closely, while Thailand’s announcement that it is monitoring the baht’s rise “24 hours a day” highlights the building tensions.

“Our concern is the speed of the adjustment,” Thailand’s central bank governor, Sethaput Suthiwart-Narueput, said last week. “It has been largely nothing to do with us.”

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