It was admirable what the central bankers did last year when they moved in coordinated fashion for the sake of reducing global instability emanating from the crisis that was still peaking; countries moved to cut their key interest rates on the same day. But now that the global economy is stabilizing, they seem to be going back again to their uncoordinated facts in the name of national interest. And following this path could derail recovery by some countries, mainly those who will be raising rates at a later time.
From a report on Bloomberg:
The danger is that such a disjointed approach will lead to volatile financial markets, a damaging drop of the dollar and slower global growth, Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., said in an interview.
“The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian, a former deputy director of the International Monetary Fund whose firm runs the world’s largest bond fund. “The real risk is that you will get a disorderly decline.”
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How do you play the currency market if this uncoordinated move is pursued?
Morgan Stanley’s Drossos recommends buying the currencies of countries that are likely to be among the first to raise interest rates while selling those of nations that have used quantitative-type easing to pump liquidity into their financial systems. She puts Australia and Norway in the first group and the U.K. and the U.S. in the latter.
Domini Wilson, senior global economist at Goldman Sachs said the Norwegian central bank would raise rates as soon as October and recommended as a top trade to buy it against the euro. However, Koon Chow, an emerging-markets strategist at Barclays in London, said Israel would be the first to raise rates. It could do it as early as next month.