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Currency Strength: Becoming Fashionable in the West, Less So in Japan and China

Macroeconomics
365 Views, 24 Jun 2022 17:18
EXECUTIVE SUMMARY
  • The Fed raised the ante in fighting inflation. Financial markets remain wary of downside risks, while even the Swiss National Bank raised its policy rate to counter rising inflationary risks. 
  • Financial fragmentation risks prevent the European Central Bank from engaging in Fed-style quantitative tightening, potentially prolonging higher inflation, while the Bank of England has been accused of being too timid. 
  • Pressure on China and Japan to tighten policy has been mitigated by low inflation compared to Western economies. Currency movements depend on central banks' willingness  to replicate Fed policy.
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