Bloomberg News

Currency War Looms as Central Banks Talk Forex: Cutting Research

December 20, 2012

Emerging markets may have further reason to complain about perceived currency wars next year as central banks in rich nations become more aggressive in chasing the economic boost of weaker exchange rates.

After a year in which developing nations such as Brazil accused the U.S. and other advanced economies of driving exchange rates down through quantitative easing, strategists at Royal Bank of Canada say Group of 10 central banks are becoming even more active in trying to lower currencies.

“We find substantial evidence that exchange rates are playing a greater role in central banks’ policy decisions,” said strategists Adam Cole and Elsa Lignos in a Dec. 14 report. “It would seem that G-10 is doomed to follow EM central banks down the path of rising intervention or at least exchange rate driven policy.”

They found many of the G-10 central banks are increasingly highlighting currency concerns and signaling they may do something about them.

To measure that, the authors created a so-called verbal intervention index, trawling through three years of monetary policy statements and assessments for currency references. They then designed a scorecard running from zero to 10. The lowest number amounts to a mere comment and the highest refers to explicitly setting monetary policy to achieve a certain exchange rate.

The findings show that aside from the Swiss National Bank, which caps the franc against the euro, Norway’s central bankers indicate the highest level of concern by often linking a strong krone to the possibility of an interest rate cut. Sweden’s Riksbank has shown spikes in concern, such as in September after the krona strengthened.

The Reserve Bank of New Zealand appears to be the most sensitive to a change in its dollar, raising the level of verbal intervention one month and dropping it the next, RBS said. By contrast, the Reserve Bank of Australia shows the lowest level of worry.

The RBC strategists omitted the U.S. Federal Reserve, the European Central Bank and the Bank of England from their indexes because they had not made any relevant currency references during the sample period.

Aggregating the results, RBC’s intervention index shows a reading of four, up from around one at the start of 2011. A four may mean the central bank is expressing a negative opinion on currencies or that the exchange rate is a barrier to growth.

With Japan’s incoming prime minister, Shinzo Abe, also eyeing a weaker yen, global policy makers are already on guard.

“My concern is that in 2013 we’ll see the growth of actively managed exchange rates as an alternative to the use of domestic monetary policy.” Bank of England Governor Mervyn King said Dec. 11.

* * *

Manhattan apartments may present less of a money-making opportunity at the moment even if their market values remain below 2008 highs, according to the Federal Reserve Bank of New York.

While most of the U.S. witnessed sharp declines in housing prices, the drop in Manhattan was not as sharp, economist Jason Bram wrote in a New York Fed publication this week.

His study of price-rent ratios in the borough showed that while apartment rents are driven by supply and demand, speculation powers sale prices to levels that can become out of line with rents.

Current rent levels, mortgage rates and property taxes make it difficult to account for the high price of apartments without assuming future price appreciation of at least 4 percent a year, Bram said.

He said recent reports of accelerating rents and stable apartment prices suggest people may already have “tempered their expectations for price appreciation.”

* * *

U.K. senior citizens are increasingly driving British employment.

There are now almost one million people aged 65 or older in jobs, double the number from 10 years ago and up 13 percent over the past year, according to a Dec. 12 report by the London-based Institute for Employment Studies.

Although these workers comprise only three percent of the working population, they account for 20 percent of the recent growth in employment, Jim Hillage, director of research, said in the report.

Thirty percent work in managerial and professional jobs, compared with only nine percent of 16 to 24 year olds. By contrast, 34 percent of the young work in sales, care and leisure, compared with only 14 percent of the old. Almost four in 10 older workers are self-employed, compared with five percent of younger workers.

Reasons for the trend: Employers want to retain skills, the self-employed want to maintain their interests and some older people find their pensions inadequate, Hillage said.

* * *

Sprinter Usain Bolt and cyclist Bradley Wiggins have another reason to celebrate their Olympic victories this year: They are likely to live longer.

A study published in this month’s British Medical Journal found more Olympic medalists were alive 30 years after their win then the general population.

Medalists lived an average of 2.8 years longer the rest of the population. It’s all right to be less than the best: gold, silver and bronze winners all had similar survival advantages, the study showed.

Medalists in endurance sports such as long distance running had a larger survival advantage than those in power sports such as weightlifting, the report said.

It was based on 15,174 athletes from nine countries who won medals in the Olympic Games from 1896 to 2010.

* * *

European governments could spur economic recoveries by removing barriers to business investment.

That’s the recommendation of McKinsey & Co.’s research arm, which calculates in a report on its website this month that private investment dropped by 354 billion euros ($469 billion) from 2007 to 2011 -- 20 times the fall in private consumption.

That’s even though publicly traded companies in the 27- member European Union had 750 billion euros in excess cash holdings in 2011, close to the most in two decades, the McKinsey Global Institute said. That provides a potential power source at a time when debt is crippling consumers and governments.

“By removing regulatory barriers, European governments could, at a relatively low cost, unlock short-term private investment that would contribute to growth -- and inspire confidence in firms that have hesitated to launch their own dormant investment plans,” the report said. Sectors such as energy and transportation are especially ripe, it said.

* * *

Women wanting to earn more money should avoid careers dominated by men, according to a study published this week in the British Sociological Association’s Sociology journal.

The survey of 20 advanced economies found that in places where men and women tended to work in different occupations, the pay inequality between them was lower. The biggest gap was in Japan. Slovenia was fairest to women, who earned slightly more than males.

The greater the degree of segregation, the less the possibility for discrimination against women, the researchers said. In nursing, for example, the fewer the number of male nurses, the more senior positions must be filled by women.

Average pay was almost equal across the sexes in Mexico, Brazil, Sweden and Hungary, according to the researchers from Warwick Business School, University of Cambridge and Lakehead University in Canada. The U.S. ranked sixth.

Women in the Czech Republic, Austria and the Netherlands fared particularly badly, they said.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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