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Here's the Surprising Winner of the Currency Wars

It's war by other means. With the Bank of Japan now buying government bonds and targeting an inflation rate of 2%, a global race to the bottom is on again.

Along with the Fed's commitment to "quantitative easing" and the ECB's promise to buy dodgy Mediterranean economies' bonds, Japan's latest move has sparked new fears of a currency war.

Like any other war, this one won't end well, either.

In fact, this same scenario played out in the 1930s, and the chances of another nasty outcome are quite high.

However, the mathematical reality is that the world's major currencies can't all be catastrophically weak against each other. It's impossible.

But the winner may surprise you. Because as this skirmish unfolds, it is the U.S. Dollar that will likely maintain its value against desperate contenders like the yen, the euro and the pound.

At the moment, those are the currencies that look distinctly unlikely to hold their own against the greater realities.

Here's why, starting with the yen.

Breaking Down the Currency Wars

The truth is Japan's stated goal of reaching inflation of 2% doesn't look all that ambitious until you realize that the Bank of Japan's forecast for inflation to March 2013 is only 0.4%, and its forecast to March 2014 is only 0.9%.

That's why the Bank of Japan has committed to a massive bond purchase scheme of about $1.2 trillion by January 2014, plus another $150 billion per month after that.

Believe it or not, that's nearly twice the size of Ben Bernanke's stimulus program for the United States, and Japan's economy is only one-third the size of the U.S. economy.

Add in a spending "stimulus" program of more than $100 billion to Japan's already ludicrous levels of debt, and it becomes obvious that trashing the yen is a likely result of these policies.

Like the Charge of the Light Brigade immortalized by Tennyson, these policies will look glorious initially but will eventually produce disaster, as they come up against the Russian guns at the end of the Valley of Death.

Admittedly, the Tokyo market is already up more than 10% since the election last month, and has further to go. But I wouldn't make any long-term bets on that market, or the yen.

Like the Bank of Japan, the Bank of England is also committed to monetary stimulus. The current Bank of Canada governor Mark Carney joins the Bank of England in July, but he has already indicated that he likes the stimulus program and would consider expanding it.

And like Japan, in relation to the size of the economy and the government deficit, Britain's stimulus bond-buying program is also bigger than the Fed's.

Compared to the other players, the European Central Bank is the most prudent; it has representatives of the German Bundesbank at various key points in its hierarchy, and its President Mario Draghi is himself monetarily cautious.

However, several of its member countries need the ECB to buy their bonds in order to avoid running out of money altogether. Moreover, one of its big players, France, has installed a crazed tax scheme for high earners that is causing a mass exodus, and is bound to bring economic trouble in coming months.

Draghi has promised to buy bonds of dodgy Eurozone governments when needed, and it seems certain that it will be needed at several points in the next year.

Then of course there's the risk the euro might break up altogether. You can guess what that would do the value of the euro.

The U.S. follies you already know about. The most worrisome feature is the $1 trillion budget deficit and the $500 billion balance of payments deficit, neither of which will be sustainable for much longer.

But compared with the rest of the world, the dollar actually doesn't look too bad. That's why the dollar looks likely to hold its own against the other major currencies. It's the best of a bad lot.

Other Currency War Winners

Of course, all of this printed money can only go in three directions. It can push up prices worldwide in a repeat of the 1970s, where by the end of the decade no country was safe from inflation. Or it could go into gold, which is still a strong buy even at current levels.

The third possible destination for all of this funny money is into currencies of smaller developed markets and emerging markets.

I'm not talking about the BRICs, all of whom have had too much hot money pour into them and have made many of the same mistakes as the big boys.

These include several Asian currencies, notably the Singapore and Taiwan dollars, and the Korean won, which have been carefully managed. In fact, the Korean currency dropped so far against the dollar in 2008-09 that it is still by no means overvalued.

In Latin America, Chile and Colombia have established funds to hold down their currencies, which have zoomed up in the past year. Australia and Canada have both been carefully run as well compared with their larger brethren, and so their currencies should be generally strong.

And in Europe, the Swiss are desperately trying to hold the Swiss Franc down to 1.20 against the euro, while the Swedish and Norwegian crowns and the Polish zloty also have shown signs of outperforming the majors.

Even still, given how it matches up against the major currencies of the world, the U.S. dollar has what it takes to end up on top.

But the truth is if you're wise, you'll avoid the lot and go for gold and emerging markets.

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  1. Dave Colonel | January 28, 2013

    First, let's remember that we sucker fish swim in a world more of lies and deception every day, every night, and every minute.
    I believe that that is a valid premise.
    Considering , the premise, is it so much of a stretch to state that many falling currencies, particuarly those of the Canada, of Auistralia, and of Japan, are not plummetting because of any self imposed policy, but because of orders from on high, dictating to the leaders of those countries that they are supposed to buy and support the USA sick man/woman.

    It is not internal, but obeisance to external order, and obey they must, or else.

    • Jeff Pluim | January 28, 2013

      Dave, you missed Martin's point about the Canadian and Australian dollars. He indicated that they would NOT fall. And if you look at their performance over the last two years, he is exactly right.

  2. Jim | January 29, 2013

    Martin's article totally ignored the Chinese dollar (yuan). By my observation, the Chinese will soon become the world's most prolific producer of goods at desirable prices (if they haven't already). As such, they will be in a position to dominate the marketplace, set prices without significant competition. The Chinese have also been stockpiling gold, which shores up their currency. In my opinion, the Chinese yuan is the one to watch.

    • Ben Robínson | May 1, 2013

      The Chinese are for the most part putting most of th?ir trust in gold which will prove to be a huge místake. One U.S. state has already passed a law to make gold and silver back in line with the constitution which states that ONLY gold and silver are to be used as American money.

  3. Luxomni | February 1, 2013

    The real losers of the currency wars are pensioners and people who do not spend more than they earn.

    • Major Kong | February 7, 2013

      This demographic, and anyone else, will only suffer to the extent they have assets in fixed income products. Invest in 'stuff' that will be on the run away train. Just be off this train before it hits the end of the tracks.

  4. frank | March 28, 2013

    people who panic and do bad things do not plan to be bad but they are still bad in the end anyway that goes for central banks. frank

  5. J Smith | April 15, 2013

    Yuan-a-bet? The Chinese currency may replace the Yen as a safe haven currency. Look for
    efforts to make the Yen more readily convertible. Nothing to fear my friends.

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