A multitude of financial issues are converging on one another and central banks are struggling to keep up. Over the past six months, the global economy has taken a nasty downturn as global demand and business investment has fallen off a cliff. Interest rates have also been a primary concern for analysts, especially in Europe where many interest rates are below zero. To make matters worse, the mayhem from Britain’s decision to leave the EU has sent markets into a fit. Global currencies are waxing and waning and central banks don’t know how to respond.
Immediately after the Brexit vote, the pound fell at an incredible rate and bottomed-out at a more than 30-year low. The market’s upheaval to the Brexit vote also impacted the euro, which has also suffered depreciation over the past year. At the same time, Japan’s economic stagnation and even contraction persists. But monetary policies aimed at weakening the yen and boosting exports has so far failed, the the yen has been gaining in value for months. Other countries are also seeing major currency swings. Switzerland’s franc has also made gains, a move that the country’s central bank has been attempting to hedge against.
Although some currency moves can be beneficial for business, wild price swings and uncertainty can hamper business investment and profit significantly. Japan has been unable to weaken its yen, leaving the Bank of Japan in an awkward and undesirable position and leading to further stagnation. Due to Switzerland’s geographic proximity to Europe, its central bank has desperately tried to weaken the franc against the euro, to no avail. Now that the euro is weakening itself, the franc and Switzerland’s economy have no room to maneuver. In the US, many companies enjoyed a weaker dollar over the past few months as an additional rate hike seemed less likely and more distant. But as other global currencies fell, the dollar has been used as a safe haven, leading to further gains.
Central banks are now caught in a difficult situation. Many of the major central banks have already exhausted monetary policies to their limits. Negative interest rates in Europe appear to be having little impact and many analysts agree that low and negative interest rates cannot be maintained. Now that currencies are going wild, central banks are struggling to find other new methods of stimulus and easing.