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Divergent monetary policy is leading to major currency swings

Mike Keogh

Many media column inches in recent weeks have focused on the dramatic moves in currency rates in 2015. Michael Keogh, Associate Director of Research & Strategy, discusses this further.

Many media column inches in recent weeks have focused on the dramatic moves in currency rates in 2015. Notable revisions to currency projections have come as a surprise, particularly given the well-documented and expected talk of divergent Central Bank Policy between the US and UK, compared to Japan and Europe. The US dollar is strengthening as the Central Bank of the United States (US Fed) are about to raise interest rates. The euro and yen are weakening as the ECB/BoJ have committed to lengthy programmes of printing money to buy bonds, indicating years of further low borrowing costs. As the chart below highlights, the euro’s collapse close to parity to the US dollar, and the yen’s depreciation, are a major step-change and should provide a welcome boost to European and Japanese competitiveness. Oxford Economics believe this trend is set to continue, with the euro and yen continuing to weaken into 2016 and economic growth proving to be challenging. However, this also creates a headache for the US Fed. Growth may be strong, but the strengthening of the dollar is squeezing the earnings of US exporters and organisations with global operations. In addition, a strong dollar will deflate imported inflation, which is already low given the retreat of oil prices, possibly spooking policy maker actions.

Currency movements alone should not, and are unlikely to be the defining factor for cross-border real estate activity. However, as pricing across many major property markets comes close to, or has already breached past highs driven by record low bond yields, the competitive advantage certain foreign investors will have in particular markets, is likely to be a major feature in 2015.

Major currency moves chart

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Michael Keogh

Mike Keogh

Director of Research

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