Is this a currency war or what?
Fast-growing nations like Thailand are trying to devalue their exchange rates to bolster their export-driven economies.
In the United States, where a “strong dollar” has been the mantra for years, policymakers are taking steps that could make the already weak dollar weaker still.
European policymakers worry that a resurgent euro will threaten growth in their own backyard. And the entire world, it seems, is urging China to level the playing field and let its undervalued currency, the renminbi, appreciate. It is a step that Beijing, by all accounts, does not want to take.
With so many economies struggling, it suddenly seems as if it is every nation for itself in the currency markets. Policymakers the world over are worried that economic rivals are trying to turn exchange rates to their advantage and considering how they should respond to preserve jobs and growth at home.
Even as Washington chides Beijing over the renminbi, critics accuse the United States and other rich nations of waging an international currency war that harks to the protectionist policies of the 1930s, when nations looked out for themselves rather than working together.
“Today, there is a risk that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices, as countries increasingly go it alone,” Dominique Strauss-Kahn, managing director of the International Monetary Fund, said during a speech in Shanghai recently. “This will surely make everybody worse off.”
The abrupt decline in the dollar – by about 10 percent since early June against major currencies – is upsetting the delicate balance of world economies still recovering from the shocks of the financial crisis.
Many other currencies, especially in Asia and in emerging markets like Brazil, are soaring as a result of the dollar’s fall. Those nations’ domestic economies are attracting floods of speculative capital seeking higher interest rates and are at risk of overheating.
The dollar’s decline is being driven by what everyone in global markets is now expecting: another round of so-called quantitative easing by the United States. In the next few weeks, the U.S. Federal Reserve is expected to inject vast sums of money into the economy in another attempt to spur growth.
While such policies may benefit the convalescent U.S. economy, they are also drawing criticism that Washington is deliberately devaluing the dollar at others’ expense.
The tensions underline that two years after the peak of the financial crisis, the world is on two tracks economically. Much of the developing world, including countries like China and Brazil, is growing fast, while the industrialized economies of the United States, Japan and much of Europe still struggle.
In Brazil, officials have been especially critical of U.S. policy. On September 27, its finance minister, Guido Mantega, first described the currency tensions as practically an “exchange war, a trade war.” Recently, Brazil’s central bank governor said that Washington’s expected monetary stimulus “creates serious distortions.”
In deflecting criticism, the United States emphasizes the role of China, an ever growing power in the global economy. Beijing continues to peg the value of its currency to the dollar, despite an immense accumulation of foreign reserves and a persistent surplus in China’s account equal to about 10.5 percent of its annual economic output, a surplus that in standard monetary theory would prompt China to allow its currency to rise.
As a consequence of the link to the dollar, the Chinese renminbi has also declined – which is one reason that despite the fall in the dollar, the U.S. trade deficit has continued to widen.
Financial markets expect the Fed to announce at its meeting in early November that it will proceed with more quantitative easing, involving purchases of bonds, which reduces longer-term interest rates and puts further downward pressure on the dollar.
That worries other countries. A stronger U.S. economy is in everyone’s interest, but many fear that investors’ capital will flee America’s low interest rates and declining dollar, instead pouring money into their markets, overheating their economies and creating the types of asset bubbles in stocks and housing that burst with such devastating effects in the 1990s.
Already there is evidence of this: U.S. investment into overseas stock funds, which was running at about $4 billion a month over the summer, has surged since Ben Bernanke, the U.S. Federal Reserve chairman, suggested the possibility of another round of quantitative easing at the end of August. About $19 billion has flowed into these funds since August 1, according to TrimTabs, a funds researcher.
Some economists play down the fears of a currency war and see the dollar’s movements as a natural readjustment to a weaker U.S. economic outlook. The dollar suffered periodic bouts of weakness before. It strengthened through 2008 but weakened in 2009. More generally, it has been on a longer-term decline since 2002. Some economists think it could recover again soon.
But others worry that by letting the dollar weaken, Washington may be stoking dangerous inflationary pressures that will have global repercussions.
Related Videos
