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JPMorgan Sees ‘Currency Debasement’ Payback Risk From Stimulus

Adam Haigh

(Bloomberg) -- The unprecedented monetary and fiscal measures unleashed around the world may lead to weaker long-term growth and currency debasement, supporting gold prices, according to JPMorgan Chase & Co.

The risk of currency debasement may heighten next year, John Normand and Federico Manicardi wrote in the report, and will show in the value of Japanese yen or gold rather than the dollar. The risk of a surge in inflation will remain trivial in 2020 and stay subdued over the next two years, they said.

The reductions in interest rates across Group-of-10 countries in response to the pandemic-induced halt to their economies left most currencies yielding close to zero on a nominal basis, though real interest-rate gaps were higher in Japan, the euro zone and Switzerland, according to the analysis.

If the U.S. continues to suck in capital and fiscal deficits overstate the risks to external financing, the payback via G-10 currencies will be concentrated in those with above average real-rate advantages to the U.S., such as the yen and Swiss franc, the strategists wrote.

The strategists concluded it is probably too early to hedge against a rise inflation and higher bond yields as well as wider spreads from sovereign ratings downgrades. The focus now should be directed at currency debasement, which they say had a “high likelihood,” given the huge financing burdening carried by the U.S.

“Those who see in the major currencies just different shades of the same long-term liabilities should simply remain long the world’s legacy reserve currency – gold,” they wrote.

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