The central banks of Turkey, South Africa and India caved in and they increased their base rates after the Turkish Lira, the South African Rand and the Indian Rupee were smoked in the financial markets. Now the Hungarian Forint is under a strong attack, too.
The big difference to these countries is that Hungary has a massive trade balance surplus. Besides the budget deficit is under 3 percents and the economic growth is accelerating, the inflation is low (under 1%). The debt-to-GDP ratio is still high (80%) but at least it’s not growing anymore.
In fact the trade balance surplus of Hungary, which in principle should matter most in determining the exchange rate, in last November has turned out to be more than expected, it was 825 million Euros instead of 804 millions. The surplus was almost 7 billion Euros in the first 11 months which is half a billion Euros more than it was in the first 11 months of the previous year. That’s big for a country like Hungary. So what’s cooking?
If tapering of 10-20 billion has this kind of effect on these small countries currency then why didn’t we see the opposite when QE was announced?
This is economic warfare pure and simple. Why any of these countries should have their currencies move this violently makes no sense. Their share of exports to the US can’t be that high. The US wants the world to say go ahead, keep print and living above your means. The Truth is that this will shorten the life of the dollar as a reserve currency. People around the world will band together against us.
We should be cutting gov’t spending and we should have reduced taxes over the last five years, but that would have only benefited the American people and let the gov’t feel the pain. We can’t have that now can we.