Currency wars could damage global recovery

Matthew Pilling said countries could try to depreciate their currencies in order to boost exports and economic growth.

Currencies expert Mr Pilling, from Harrogate, has set up a Central FX (CFX), backed by a City broker. The dealing desk's clients range from FTSE 250 companies to small and medium-sized enterprises (SMEs) and individuals buying a property or settling an invoice abroad.

Analysis produced by Mr Pilling and Richard Perry, CFX's chief market strategist, said the US Federal Reserve's decision to spend another $600bn (372.75bn) – a greater sum than expected – on quantitative easing, an asset-buying spree dubbed QE2, could underline the view that the world's largest economy is still underperforming. It meant the dollar later lost ground against the euro.

"The weakening of the dollar will act to further strengthen the emerging market currencies at a time at which the countries themselves are trying to do the complete opposite.

"The protectionist policies that were supposedly averted by the G20 may now resume as countries look to depreciate their currencies to aid export-led growth.

"This could seriously impact international trade at a time where the world economy was just beginning to get to its feet."

The counter argument, Mr Pilling and Mr Perry added, is that the dollar could have been sold off so far already, that much of the reaction has already been factored in.

Mr Pilling said there is currently a demand for brokers which could provide clarity as businesses try to mitigate the effects of currency fluctuations and CFS aims to win more work in Yorkshire by offering "bank-beating" exchange rates.

"(The FX market) is extremely volatile. Every day seems to release more and more data with swings one way and another. We have seen the pound start fighting back and that helped an awful lot and there was a significant movement."

CFX's clients have come from a range of sectors, particularly oil and gas companies, as well as manufacturers, and a significant market for Britons wanting to buy property in Spain and the Balearic Islands. "If they are buying a house in Spain it is their dream home and they want brilliant care. We will be in touch throughout the whole process. We will buy the currency for them – they like that personal touch."

CFX, based in Jewry Street in the Square Mile, is owned by Central Markets (London), a privately-owned boutique stockbroker. The foreign exchange firm was established 10 months ago by Mr Pilling, a Durham University graduate who has previously worked at foreign exchange broker Global Reach Partners, and as an equity derivatives researcher at financial services search firm Kinsey Allen.

The firm offers foreign exchange management services including strategy and hedging, as well as contracts for difference (CFDs), and describes its rates of exchange as "bank-beating" because it keeps costs low.

"We try to get closer to the interbank market rate," said Mr Pilling, a former pupil at Cundall Manor School in North Yorkshire and Oakham School in Rutland.

"We are not as greedy so don't need as much money to run our business.

"We are a start-up but we are owned by an established business. We are new kids on the block and have traded for four months but our client base has grown quickly."

A period of turbulence in equity and currency markets, as well as weeks of speculation over QE in Britain and the US, has made it a challenge to forecast foreign exchange trends.

Mr Pilling, who studied music at Durham University, said he used to read about financial markets during rehearsals. He also had a spell as a church organist at St Peter's in Harrogate before starting his degree.

Dark clouds of protectionism

Recession and high levels of public debt in the West have had a significant impact on major currencies. The heads of three international organisations told G20 leaders that the global economy, as well as the US's relationship with China, are threatened by "dark clouds" of protectionism. Tensions over exchange rates, high unemployment and imbalanced economies are driving the pressures, warned Pascal Lamy, Director-General of the WTO, Angel Gurra, the Secretary-General of the Organisation for Economic Co-operation and Development and Supachai Panitchpakdi, Secretary-General of the UN Conference on Trade and Development. "The stability of the trading system will be put at considerable risk if currencies move in what some perceive as the pursuit of an exchange-rate-induced comparative advantage," they said.