Global currency markets made front-page headlines last week, as the euro plunged towards parity with a surging dollar, and the pound similarly soared against the single currency. But why is the dollar so buoyant and the euro spiralling downward? And should you lock-in the strong pound by buying your summer holiday money now? You may, quite reasonably, think that economic fundamentals such as GDP growth and cross-border trade flows still drive exchange rates. Unfortunately, though, you’d be wrong. For we live in the age of “extraordinary monetary measures” and “central bank diktat”.
That may sound like a remote, jargon-laced statement, the musings of a nerdy economist. I’d say, in response, that the recent actions of Western central bankers are provoking not only heightened market volatility, but also increasing international conflict and the looming prospect of another Lehman-style systemic lurch. The dangers, sadly, are very real.