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Currency wars threaten Lehman-style crisis

Inside the new European Central Bank headquarters in Frankfurt, central bankers are increasing the chances of another Lehman-style crisis
By?Liam Halligan | 1:07PM GMT 14 Mar 2015

Global currency markets made front-page headlines last week as the?euro plunged towards parity?with a surging dollar and the pound similarly soared against the single currency.

But why is the dollar so buoyant and the euro spiralling downward? And should you lock in the strong pound by buying your summer holiday money now?

You may, quite reasonably, think that economic fundamentals, such as GDP growth and cross-border trade flows, still drive exchange rates.

Unfortunately, though, you’d be wrong. For we live in the age of “extraordinary monetary measures” and “central bank diktat”.

That may sound like a remote, jargon-laced statement, the musings of a nerdy economist. I’d say, in response, that the recent actions of Western central bankers are provoking not only heightened market volatility, but also increasing international conflict and the looming prospect of another Lehman-style systemic lurch. The dangers, sadly, are very real.

Currency dealers, and the ubiquitous computerised trading robots, are influenced far less these days by growth or inflation forecasts than by the market’s view on the origin of the next splurge of quantitative easing.

That judgment is driven, in turn, by the coded missives of central bankers like the US Federal Reserve’s Janet Yellen, Mark Carney at the Bank of England and, particularly in recent months, Mario Draghi at the European Central Bank (ECB).

Why did the euro fall to almost $1.05 last week, a 12-year low, having dropped some 12pc against the greenback since the start of the year? Why, when each pound bought you just €1.19 last March, can holidaymakers now expect €1.40 for every pound exchanged?

The main reason is the ECB’s long-awaited programme of virtual money-printing, which launched last Monday. Under euro-QE, the eurozone will be flooded with at least €1,100bn (£825bn) of newly created money over the next year and a half, as the Frankfurt-based central bank buys government and corporate bonds at the rate of around €60bn a month.

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