Weaker Currencies Can Lead To Stronger Economies

0
885

Expats around the world are wondering why their local currencies are weakening against the pound and dollar despite benefitting from strong local economies.

In a topsy-turvy world, economic growth and interest rates are stronger in many expat destinations outside Europe, but the spending value against the pound and dollar is falling.

As an example, more than a million British expats in Australia and New Zealand are bemoaning the fate of weakening currencies.

Yet economic growth is strong but not startling and interest rates in Australia are 3.5% and 2.5%in New Zealand.

Both the Australian and New Zealand dollars have dropped significantly against the pound and US dollar in recent weeks.

Booking.com

Knee jerk

For expats, this reduces the value of any UK pension payments, including the state pension, which are paid in pounds and need switching to local currencies.

The problem for expats is the world is an interlinked global economy; seemingly unrelated events in far off countries are actually tied together.

Investors seem to knee-jerk to world events and shift their money around at the first hint of trouble.

The ripple effect tends to start with civil unrest or conflict.

The problems in Syria and Iraq with the march of the Islam Stat (ISIS) and even student demonstrations in support of more local democracy in Hong Kong are upsetting the values of less mainline currencies – including the dollars in Australia and New Zealand.

As soon as some concern is floated, the wealthy shift their money to a less risky safe haven.

The euro is out of contention due to miserable negative saving rates and the threat of deflation, so investors look for somewhere politically stable.

Safe havens

At the moment those safe havens are the reliable United States and Britain.

Stability injects investor confidence, while improving economies and every sign that interest rates are going to rise within a few months bolster that confidence with the knowledge that yields are going to improve in the short-term.

Secretly, the central bankers managing these riskier currencies are not too worried about a weakening of their values against the pound and dollar.

A weaker currency makes the price of imports more expensive, making the price of home-produced goods more attractive, while encouraging overseas markets to take in exports which are cheaper as well.

The major export market for both Australia and New Zealand is China, so weakening currencies improve their economic relationship.

Leave a Reply