Q. Dear Josh, what exactly are these currency wars?
A. The recent currency wars are essentially a result of key governments attempting to manipulate the strength of their own currencies to suit their economic needs. The move by Japan last month to sell a reported ¥2 trillion was a prime example of this.
The currency wars are just one element of a wider problem – low growth. A strong currency poses a significant risk to exports, which become more expensive the stronger the currency. Consequently, countries lose their international independence and struggle to export successfully. This has been particularly relevant over the past few years since China has kept its currency artificially weak. This is why we have seen Japan and other key export-dependent nations look to devalue their own currencies to support growth prospects.
Many states are now seeing the act of devaluing their currencies as a new weapon to boost their recovery efforts. On the plus side it is making holidays to the US cheaper for us Brits. The pound hit a new nine-month high against the US dollar last week of just below $1.61.
Q. Dear Josh, just how important has the US dollar been for equity markets?
A. Movements in the dollar have been absolutely crucial for equity markets. Plot a chart of the US dollar index and the FTSE 100 index side by side and you will note that there has been an inverse correlation for a number of years and this correlation has strengthened even more so of late. This is because the strength of the US dollar is one of the key drivers behind demand for dollar-denominated commodities such as copper, gold or crude oil as a cheaper US dollar makes these commodities more attractive. Mining and energy stocks have a key weighting on the FTSE 100 Index, which means that they have a large influence over whether the blue-chip index rallies or falls depending on the strength on their share prices.
The dollar has been severely weak of late, with the US dollar index falling to a new 10-month low just last week. This has therefore helped to boost commodity prices and in turn the key energy and mining stocks on the FTSE 100.
Q. Dear Josh, I have read that City Index has partnered up with the new Wall Street Money Never Sleeps film. So what’s your favourite Gekko quote?
A. “Lunch is for wimps!”
You can learn more about the markets and spread betting with Josh at his free City Index seminars.