The currency conundrum – is it another leg up for gold?

The logic in the currency markets usually has been: sell lower interest rate currency and buy higher/stronger rates. The strategy seems to have reversed now – low/zero yield seems to positive. Sample this:

“… when in Prague the Czech central bank slashed its interest rates to an all-time low, the Czech Koruna actually bounced vs. the Euro...

… 100-basis point cut to South African rates worked to stem the slide in the Rand - now trading one-third below its US-Dollar value of last February despite paying fully 1,050 basis points more...

… in London, the Bank of England took its base rate further into record-low territory at 1.0%...yet currency traders pushed the Pound Sterling to a two-week high above $1.4650...

… when the Reserve Bank of Australia cut its interest rate to a 45-year low, the Aussie Dollar bounced from near-6 year lows in response...

… after the central bank of Norway cut its target interest rate by 50 basis points to 2.50%, the Norwegian Krone turned higher after losing one-third of its value vs. the Dollar since July last year...

… when the world's No.2 behind the Fed, the European Central Bank (ECB), opted to keep its rates flat - the Euro lost 2¢ from this week's high…...despite paying returns to cash fully 200 basis points above the Dollar.”

The phenomenon was first witnessed with USD and JPY as the respective central banks raced to cut the rates to near zero. This clearly is a deflation biased view which it appears is looking to punish debtors.

Euro is likely to suffer in this sense till it announces a rate cut in March. If it also joins the zero interest band-wagon then one may wonder what’s left for the currency markets to play with? Is this is a precursor to a crisis brewing here? Does gold get a further leg up – it’s anyway a zero yield currency!

Look forward to readers views.

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