THE BRITISH pound has risen 10 per cent against the US dollar, 6 per cent against the euro, and 11 per cent against the Japanese yen since July of last year. While strength in an economy is generally a good thing, this time may be a little different.
The trouble comes from the “what’s next” part of this equation, as currency strength may actually pose more of a threat than a benefit in the current environment. As the value of sterling continues to rise, exporters need to charge higher prices in places like the United States or Japan just to continue getting the same amount of sterling back into their companies.
Charging higher prices for goods, particularly in this global low growth environment, isn’t the easiest thing to do. Consumers can simply look to replacement goods or services from other economies that don’t have to charge higher prices.
This is why the strategy of a central bank weakening its currency – to export more goods and services outside – has been called a “beggar thy neighbour” strategy. While it may help one economy, it threatens others.
As deflation is starting to show in places like Spain and France, the global economy may be moving closer to a tipping point.
To learn how a strong currency can pose threats to a healthy economy, read my article The Nucleus of the FX Market: http://bit.ly/Fxnucleus
To learn more about how the fundamentals move prices in the FX market, please visit http://bit.ly/1kfL5hW
James Stanley is a senior instructor of trading at DailyFX.