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Standish Sees Major Differences between Current Currency Wars and Competitive Devaluations of the 1930s

BNY Mellon Investment Manager Says Current Deflation Shock Hit Economies Unevenly

The so-called currency wars of today have little in common with the competitive currency devaluations following the Great Depression of the 1930s, according to the March 2013 monthly report from Standish Mellon Asset Management Company LLC, the Boston-based fixed income specialist for BNY Mellon.

The current loose monetary policies implemented by most developed market countries are intended to spur domestic economies, according to the Standish report: March Bond Market Observations. This is significantly different than the 1930s when countries weakened their currencies to obtain more favorable exchange rates and boost exports, the report said.

Fixed income investors need to understand the underlying causes of the currency trends as they could offer attractive opportunities to enhance their returns, according to Standish.

"The key difference between the 1930s and today is the nature of the economic shock that prompted the monetary policies," said Thomas Higgins, global macro strategist for Standish and co-author of the report. "During the Great Depression of the 1930s, the deflationary shock hit all countries more or less equally. This time, developed market economies have been hit much harder than the emerging markets."

That means that policies that apply in developed markets could adversely affect emerging markets, according to the report. Standish said that most developed market countries are contending with sluggish growth and low inflation, while emerging markets are achieving healthy growth and face somewhat elevated inflation.

"There are exceptions to the primary trends of the current period as Japan and Switzerland appear to be using monetary policy to make their currencies more competitive," said Federico Garcia Zamora, senior currency strategist for Standish and co-author of the report. "The report concludes both currencies are over-valued. Their policies, along with other trends are among the reasons cited in the report for being bullish on the U.S. dollar as a safe-haven currency."

Standish also favorably views the currencies of economies expected to benefit from high commodity prices, relatively higher domestic interest rates and a better fiscal profile compared with other developed markets.