By: Dr. Mike Campbell

In principle, as a currency weakens, its exports become more competitive (a good thing), but the cost of imports rises and the worth of foreign earnings generated abroad in other currencies also diminishes when repatriated to the home country. In essence, what is needed is to hit the right balance.

Japan and Switzerland have been struggling with their mantles as save haven currencies. The value of their currencies has risen significantly as investors seek to find a safe harbour in turbulent times. Japan has made three largely unsuccessful forays into the forex markets where the central bank has sold Yen in an attempt to drive the currency down. The Swiss have intervened in the markets to tie the Franc to a minimum value of €1.20 to the Franc and so far, the move has been successful; currently the Swiss Franc is worth €1.2275 and has remained above the threshold since 6th September, despite a decline in the Euro value against other major currencies.

South Korea is the third largest economy in Asia behind China and Japan. It has been suffering from a depreciating currency which has fallen by 10% relative to the US Dollar over the past month. The Bank of Korea has stepped in to shore up the currency and arrest the fall. As the currency falls, the cost of imported goods (and raw materials) rises, fuelling inflation. Inflationary pressure is of current concern in many Asian countries, not least of which is South Korea. Pushing up interest rates may choke off inflation within the country, but it will have little effect on rising costs of imports due to the relative devaluation of the currency.