Each of the world’s major trading and transaction currencies – the dollar, euro, sterling, yen and now the renminbi – is beset by policy uncertainty and doubt. Volatile currency cargoes are heading towards cloudy horizons on storm-tossed seas. The Federal Reserve is on the horns of a familiar dilemma about when to carry out only the second interest rate rise since 2006. Concern about Britain voting to leave the European Union on 23 June is just one of the anxieties staying the Fed’s hand ahead of its monetary policy meeting on 14-15 June. Japan and Europe are weighed down by debt worries. It seems increasingly likely that Haruhiko Kuroda and Mario Draghi, the respective central bank chiefs, will complete their spells in office (in 2018 and 2019) without tightening credit. China is sticking to its contention that its economy will avoid a ‘hard landing’ and the renminbi will remain reasonably strong on a complex trade-weighted basis combining indices from the CFETS foreign exchange system, the Bank for International Settlements and the International Monetary Fund. Given nervousness about world economic health, asset managers are adopting caution as their watchword. Central banks, despite the undoubted costs of maintaining high reserves, believe it is even more costly and unpleasant not to have adequate stocks when times are tough.
Demand for, and competition between, reserve currencies will persist. These themes are covered by Gary Smith and John Nugée, two longstanding sovereign asset specialists, in an OMFIF paper on this subject. And they were high on the agenda at a seminar ‘Towards a system of multiple reserve currencies’, organised by the IMF and the Swiss National Bank in Zurich on 10 May. We reproduce some of the introductory thoughts on the challenge to dollar ‘dominance’ spelled out to the meeting by Claudio Borio of the BIS. On US monetary policy, Darrell Delamaide and George Hoguet weigh up the pressures on the Fed. Ravi Menon of the Monetary Authority of Singapore, Martin Taylor of the Bank of England, James Bullard of the Federal Reserve Bank of St. Louis and Andrea Enria of the European Banking Authority – who along with Chicago Fed chief Charles Evans all spoke to OMFIF audiences in the past month – expound their views. Peter Warburton explores the tangled links between ECB policy and European inflation expectations. Mojmír Hampl of the Czech National Bank writes in defence of ‘active central bankers’. Frédéric Samama delivers a further instalment of how a decarbonisation drive among asset managers can support government climate change policies. Backing Ravi Menon’s line that fears of a China ‘hard landing’ are overdone, Juan Carlos Martinez provides some historical parallels to China’s One Belt One Road initiative. Kingsley Chiedu Moghalu urges African policy-makers to shake off the shackles of economic orthodoxy. Eduardo Borensztein explains how Brazil must replace its broken economic model. This month yields a bumper crop of book reviews, linked to febrile European politics. William Keegan gives a bittersweet verdict on Gerard Lyons’ book, The UK Referendum: An Easy Guide to Leaving the EU, while David Marsh lends a sympathetic ear to Let’s Stay Together: Why Yes to Europe by Denis MacShane. Alex Saeedy reviews The Euro Trap by arch-critic Hans-Werner Sinn, while Meghnad Desai is disappointed by Tom Bower’s Broken Vows: Tony Blair – The Tragedy of Power. We end on a positive note: 83% of respondents in the May advisory board poll say rising US interest rates are unlikely to pose a substantial threat to the world economy by the end of 2016. We must hope they are right.