Euro seen as most resilient to climate change, yuan most exposed: Barclays

"Countries experiencing drops in productivity and other production inputs will likely also experience less capital inflow," and as a result, weaker currencies, Barclays said. [Dick Thomas Johnson / Flickr]

Climate change could play out to the advantage of the euro, while China’s yuan and the Japanese yen are set to suffer the most without greater efforts to mitigate the effects of global warming, Barclays said in a report.

The British bank mapped the effects of climate change on exchange rates, saying rising temperatures and associated economic costs could pose “rising and costly risk, with tangible FX impact”.

In the bank’s most severe scenario, the euro is the outperformer, appreciating 0.5% against the dollar by 2030 and 3.9% on average over the next five decades, with euro zone’s trade openness helping soften the economic impact of global warming.

In contrast, Chinese yuan could lose 5.5% by 2030, with a further a 7% depreciation over the next decade, which could worsen to more than 10% per decade over time.

Barclays said it used national productivity and capital flows forecasts for the next five decades to model how, given their current conditions, countries’ growth and consequently their currencies could be affected by climate change.

Rising sea levels, variation in crop yields, changes in the occurrence of diseases, tourism, or even heat-induced hits on labour productivity are some of the factors included in the analysis, Barclays analysts said in a report.

Worldwide losses from extreme weather events totalled $1.38 trillion in the previous decade, rising nearly eight-fold since the 1970s and are expected to top $2 trillion this decade, according to the report.

“Countries experiencing drops in productivity and other production inputs will likely also experience less capital inflow,” and as a result, weaker currencies, Barclays said.

The yuan could lose 53% of its real value over the next 50 years as a result of China’s rapid industrialisation over the past two decades and “lenient environmental policies,” it said.

“The risk of prioritising growth over environment and a lack of local environmental network (eg, NGOs, lawyers, journalists) remain significant challenges,” Barclays said.

For Japan, rising sea levels pose the biggest threat, it said, projecting environmental factors to shave almost 3% of the yen’s value by 2030. It could lose 55% in total over 50 years and become the world’s worst-performing currency as early as mid-century, the bank said.

The US dollar is seen outperforming, benefiting from “the diverse nature of the U.S. economy,” Barclays said.

Its model suggests the Australian dollar would also outperform despite similar exposure to rising sea risks as Japan, with commodity exports and trade openness limiting damage to growth, while emerging market currencies were seen coming under pressure.

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