Increase in money supply creates currency devaluations
On March 12, 2020, the US Federal Reserve announced that it planned on implementing up to US$1.5tril in asset purchases as an emergency measure to provide liquidity to the US financial system. Following this event, the European Central Bank launched a temporary asset purchase programme of private and public sector securities worth up to €750 billion. These measures occurred amid massive economic and market turmoil brought on by the rapid spread of the coronavirus pandemic.
These policies are considered Quantitative easing (QE), a form of unconventional monetary policy in which a central bank purchases longer-term security from the open market in order to increase the money supply and encourage lending and investment. Buying these securities adds new money to the economy, and also serves to lower interest rates by bidding up fixed-income securities. It also greatly expands the central bank’s balance sheet.
However, there are drawbacks in executing quantitative easing. If central banks increase the money supply, it can cause inflation. In a worst-case scenario, the central bank may cause inflation through QE without economic growth, causing a period of so-called stagflation. Although most central banks are created by their countries’ government and are involved in some regulatory oversight, central banks can’t force the banks to increase lending or force borrowers to seek loans and invest. If the increased money supply does not work its way through the banks and into the economy, QE may not be effective except as a tool to facilitate deficit spending.
Another potentially negative consequence is that quantitative easing can devalue the domestic currency. For manufacturers, this may help stimulate growth because exported goods would be cheaper in the global market. However, a falling currency value makes imports more expensive, which can increase the cost of production and consumer price levels.
Given that quantitative easing has an impact on currencies, this policy presents trading opportunities and challenges in Forex. Countries that adopt quantitative easing are likely to have devaluations on their currencies, at least in the short term. As Forex is the most liquid financial trading instrument in the world, it presents great amounts of investment opportunities as major economic developments take place throughout the day.
Various developments that will happen in quick succession are likely to contribute to volatility in major financial markets. This is the time when there are plentiful investment opportunities for investors to invest and grow their wealth. At TLC, we track developments in global financial markets to ensure we can achieve good financial returns on our clients’ investments. Our foreign exchange hosting platform is designed to enable retail investors to invest in foreign exchange and passive income without the need for much time and thought. Our platform generates profitable monthly profit, peaking at 18%.
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