SocGen’s Edwards: Currency War Will Hit US as Yen Plummets

November 4, 2014

The U.S. dollar will rise to a 16-year high against the Japanese yen, triggering another stage of currency wars next year as countries struggle to remain competitive.

That’s the forecast from Albert Edwards, the global investment strategist at Societe Generale, who expects Japan’s latest effort to boost commercial activity with monetary stimulus will force other countries to print more money or risk economic harm.

“The yen devaluation will drag down other competing currencies in the Asian region,” Edwards said in a note obtained by “Do investors really think China can cope with a devaluation of the yen from here? They can’t and they won’t. They will devalue.”

The Bank of Japan, the country’s central bank, last month surprised global markets with a plan to increase its stimulus by between $91 billion and $181 billion to about $725 billion a year. The country wants to make the yen cheaper as a way of encouraging people and businesses to spend money, and to make exports less expensive to foreign buyers.

Edwards said the money printing will lead the yen to fall 25 percent from today’s level to 145 yen per dollar, a level last seen in 1998 when Japan was in its economic “lost decade.” Japan’s currency has lost 20 percent of its value in the past two years.

The Federal Reserve last month completed its third round of quantitative easing, the term for buying debt securities in an attempt to push down interest rates and spur economic growth.

‘Japan Will Lose Control’

The further drop in the yen will possibly force the U.S. into another round of money printing, Edwards said.

“Japan will lose control of the situation given the quantity of QE being spewed into the markets,” Edwards said. “Unless the U.S., the eurozone, or indeed Korea, is prepared to come remotely close to Japan’s rate of QE, jawboning currency stability will do very little.”

Edwards is known for his “Ice Age” thesis that said money printing by central banks was unsustainable, and that recessions may be postponed but not avoided altogether.

He warned that stock investors may be unprepared for the economic pain that currency wars might inflict.

“The market still does not seem to have grasped the significance of this phase of the currency wars,” he said. “It reminds me of the 2006-07 period when falling U.S. house prices and then widening corporate bond spreads were totally ignored by upbeat equity investors until it was too late.”

Edwards isn’t the only one warning about currency wars. A much stronger dollar may end up harming the U.S. economy, another analyst said.

“The U.S. for now remains the only bright spot. But falling currencies worldwide point to further dollar strength,” said Diana Choyleva, head of macroeconomic research at Lombard Street Research, in the Financial Times. “The hope must be that the greenback does not overshoot so fast that it cripples the U.S. economy too.”