El-Erian Says Central Bank Divergence Has Added Confusion

The “divergence” of economic performance and monetary policy among three of the world’s most systemically important economies – the eurozone, Japan and the US – has added another layer of confusion for the rest of the world, with particularly significant implications for small, open economies. The surprising actions taken by Singapore and Switzerland were a direct response to this divergence, as was Denmark’s decision to halt all sales of government securities in order to push interest rates lower and counter upward pressure on the krone.

Of course, not all currencies can depreciate against one another at the same time. But the current wave of efforts, despite being far from optimal, can persist for a while, so long as at least two conditions are met.

The first condition is the continued US willingness to tolerate a sharp appreciation of the dollar’s exchange rate. Given warnings from US companies about the impact of a stronger dollar on their earnings – not to mention signs of declining inward tourism and a deteriorating trade balance – this is not guaranteed.

via The Guardian

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