Currency Woes Rack Central Banks

At WSJ, "Strengthening Currencies Bedevil Central Banks":

Britain’s vote to leave the European Union has set off a fresh round of currency pressures in the world’s largest economies, further complicating efforts by central banks to spur growth.

The pound hit a three-decade low on Monday, and both Standard & Poor’s and Fitch Ratings cut their ratings on the U.K., saying that last week’s vote raises risks to the country’s economy.

Meanwhile, the Japanese yen, Swiss franc and U.S. dollar posted further gains, as market turmoil resumed after the weekend and sent investors in search of havens. Government bonds also benefited from the flight from risk, with the yield on the 10-year British bond falling below 1% for the first time, as the rout in U.S. and European stocks deepened.

The currency moves, in particular, pose risks for businesses and in turn for economies that have posted lackluster performance.

The resurgent yen and franc are putting renewed pressure on companies in Japan and Switzerland. Meanwhile, U.S. companies that had benefited from a weakening dollar this year face a bout of currency-related stress as the second-quarter earnings season looms.

Stronger currencies tend to make a country’s exporters less competitive as the effective price of their goods goes up. They also tamp down inflation as import prices fall, frustrating outcomes for central banks in Japan, Europe and the U.S. that are trying to calibrate policies to boost growth and inflation. The moves could tempt central banks to intervene or modify policies to limit the upward pressure.

“Policy makers are unlikely to sit idly by while their strengthening currency derails any economic progress that they’ve made,” said Omer Esiner, chief market analyst at international-payments firm Commonwealth Foreign Exchange. “Central banks would be justified in stepping in.”

The problem is currencies can’t all weaken at once. The Swiss have been trying to push the franc down against the euro. The European Central Bank has nodded to the benefits of a weaker currency as it lowers interest rates into negative territory and expands its bond-buying programs. Japan has tried to weaken the yen against the dollar. And Federal Reserve officials have cited the stronger dollar as an impediment to growth.

All are showing little success, and investors have raised concerns that central-bank tools for influencing currency values are losing their effectiveness...

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