Monetary Stimulus Fuels Currency Volatility, RDQ Economics Says

Currency volatility will remain elevated until central banks around the world end stimulative monetary policies, said John Ryding, chief economist at RDQ Economics LLC in New York.

Ryding spoke at the Bloomberg Global Inflation Conference in New York hosted by Bloomberg Link. He was on the panel with Dean Curnutt, president of New York-based Macro Risk Advisors LLC, and James Rickards, senior managing director of Tangent Capital Partners.

“As long as monetary policy in the U.S. and in Europe and in the U.K. have got the spigots wide open, then you may take turns in trying to do something on your currency, but in absolute terms monetary policy is too easy in trying to fix what is essentially a non-monetary policy,” Ryding said.

Central banks from the Federal Reserve to the Bank of England have kept interest rates at record lows since the start of the financial crisis. The Fed has purchased $2.35 trillion of debt in an effort to stimulate the economy and the Bank of Japan and Swiss National Bank have each intervened in the currency market to try to curb their currencies’ appreciation.

These actions lead to increased volatility in the foreign exchange market, making it riskier to invest, Ryding said. Curnutt and Rickards joined Ryding in saying that gold is a stable alternative.

Gold Role

“Gold has no risk, especially against inflation, and it has no risk of devaluation,” Rickards said. “If you like money you should have some gold.”

Implied volatility among currencies has averaged 14 since September 2008 in JPMorgan Chase & Co.’s Global FX Volatility Index. The average for the five years before that was 9. Gold rallied during the financial crisis and has increased 31 percent this year.

The dollar has dropped 5 percent this year against its nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The euro has dropped 0.2 percent and the Swiss franc has increased 3 percent.

“As we look at the actions of the Swiss National Bank this week, you see again that volatility or risk just changes form,” Curnutt said. “The SNB was very successful in moving the currency, but they also tremendously damped the volatility. Implied volatility on the Scandinavian currencies has actually come up a lot.”

Franc Falls

The franc fell by a record against the euro on Sept. 6 after the SNB set a franc ceiling -- the first time such a limit was set since 1978 --saying it would use “unlimited” quantities of cash to cap the increase. The franc had appreciated 13 percent this year against the euro before the ceiling was set.

The currencies of Norway and Sweden have gained the most this week against the other developed nations. The Norwegian krone added 1.9 percent and Sweden’s krona appreciated 1.6 percent, according to BCWI.

Curnutt, Ryding and Rickards spoke in a panel discussion titled “Currency Wars: Battle of the Weakest” at the conference. Last year, six days after the Fed suggested at its Sept. 21 meeting that it was ready to start buying bonds, Brazilian Finance Minister Guido Mantega said governments were engaging in a “currency war.”

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