The foreign exchange market is undoubtedly experiencing a currency war where the currency's value seems to be out-of-control of the policy makers, at least for the short-term period. After a gradual recovery from the 2008 financial crisis, another hurdle blocking the a global economic recovery was the European debt crisis. It not only effected the European market but it also slowed down economic growth in the U.S.
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Increasing Balance Sheet
FED chairman Ben Bernanke announced the start of QE3 recently that was intended to improve economic growth by lowering the unemployment rate through unlimited bond-buying. The day the announcement came, the greenback experienced a sharp decline in its value while other major currencies along with gold enjoyed bullish movement.
Devaluation & its Impact
The QE3 plan states that the bond-buying is unlimited and would continue until and unless the job market gets in better shape and consumer spending increases. This will cause the value of the dollar to plunge even further and result in increased inflation. This might cause another issue, that of needed pay raises because people might not be able to spend freely on ever increasing pricey items with their stagnant income.
What's in it for the U.S.?
Most people think of currency devaluation as a purely negative sign for the country's economy; however, when it comes to the U.S. the case is totally different. Neither the country is going to get bankrupt nor would the worth of its reserves decline, because it has invested in gold that constitutes 76% of the total foreign reserves of the country. Gold is traded against the U.S dollar so whenever the dollar falls, it results in bringing up the price of gold, and vice-versa.
What's the Safe Haven?
The unemployment claims are increasing along with the number of people who don't even claim for unemployment benefits and have stopped looking for jobs and that is reason why the unemployment for the month of September went down to 8.1% from 8.2%.
Now the investors are looking forward to the non-farm payrolls and the unemployment data for the month of October, and if for instance this situation persists, then gold would definitely be the safe haven where people would convert their savings into something that would at least cover for the inflation in future.
Currency War... How?
The dollar regained its value against the majors as the easing methods are also being taken by the Japanese Central Bank and the European Central Bank has already announced the OMT plan where it intends to ease the economy by asset purchases or bond-buying, but it hasn't triggered yet as it all depends on the Spanish government now whether they want to have the bailout or not.
Therefore, it is getting difficult for the central banks to get their relevant currency's value in a certain range as the foreign exchange market has been quite volatile and uncertain these days.
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Article Source: http://EzineArticles.com/?expert=Rimantas_Petrauskas
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