With interest rates already low, the central banks are turning toward unconventional accommodative monetary policy such as quantitative easing, which has resulted in a dramatic increase in the monetary base levels and as a result, weaker local currencies.
In short, while the goal of such monetary policy is not a weaker currency, a weaker currency is a very normal side effect and central banks obviously understand this and are willing to live with it for the same reason they’re trying to drive both long- and short-term interest rates down.
So what does this mean for investors? As central banks aren’t likely to end their stimulus efforts anytime soon, investors should expect more exchange-rate volatility in the months ahead. In addition, dollar-based investors in certain markets, most notably in Japan, may want to hedge their exposure to weaker local currencies in order to potentially hold on to more local market gains.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.