The "J Curve Effect"

First it was Dollar, then Euro and now Pound. After grumbling and crumbling over Rembini’s undervaluation, these countries are shedding their age old belief of maintaining a strong currency; rather they are happy loosing its value. As Dollar, Euro and Pound depreciates, the central banks and governments of these countries lap up the loss in value terming it as an opportunity to make their exports competitive once again, which may up domestic production and employment opportunities in the short and medium term. I however have serious doubts over such “rosy” effects of currency depreciation on their domestic economies in general and employment in particular. Reason is simple, UK, US and Eurozone consumes a lot of imports, especially the consumer goods and primary / intermediate producer goods. Currency depreciation would mean competitive exports but expensive imports. Expensive imports would immediately translate into high inflation. Although the inflation is low at present, but going forward US and its allies readies itself for a rate increase, which coupled with currency depreciation risk magnifying the effects of inflation.

The advocates of free market mechanism are putting checks in place to skew their currency valuations negatively. My advice, don’t do that, these currencies are already under pressure for wrong reasons and I see valuation realignments among major currencies in the medium and long term. Take things as they come and don’t rush into currency depreciation. The economies are still on life support so don’t remove the ventilators as yet. The “J Curve effect” may just last too long to neutralize the positive effects of currency depreciation on domestic production and employment in the short and medium term.