Sign of the Times: Currency Wars
by S. Lord
If central bank rhetoric is any guide, the simmering spat between those nations who would like to see their currencies remain low (i.e. the United States) in order to boost exports and those whose currencies are skyrocketing (i.e. basically everyone else), has reached a whole new level. Brazil’s foreign minister initially let the term “currency war” fly a couple of weeks ago, and since then, an astounding number of otherwise highly reticent central bankers have become unusually vocal in their comments on the topic.
For its part, the U.S. has been quick to point the finger at China’s yuan policy. As noted online by The Wall Street Journal this morning, Tim Geithner’s comments tying currency rates to growth will leave some economists scratching their heads.
China’s undervalued currency is triggering an international currency war that risks undermining the global economic recovery, U.S. Treasury Secretary Timothy Geithner said Wednesday. ”When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same, and this sets off a dangerous dynamic,” Geithner said.
The irony here is that the Fed’s continued quantitative easing policies, essentially buying Treasury bonds in order to maintain low interest rates, is doing the same thing. Actions taken by Brazil, South Korea, Taiwan, Switzerland and Japan in just the past two weeks have been done to counter strength in their currencies caused partly by the weak-dollar policies (unwritten and otherwise) of the United States.
Eventually, Chinawill have to revalue the yuan. Trade disparities, a growing domestic market and China’s surplus reserves make it a certainty. But timing is the issue, and for the time being, Secretary Geithner should be careful what he wishes for – the ba
rgain hunters at WalMart are not going to relish higher prices for products that have been at rock-bottom levels for years. And while it may surprise those at the Fed, China can be excused for putting its own economic interests ahead of those of the United States.
Ultimately, it will be sustained economic growth that removes the need for the Fed to provide additional easing in any form. At that point, pressures against currencies such as the Euro will subside. More troublesome may be those pressures in commodity-driven countries like Brazil, Canada, Australia and Indonesia that are experiencing huge capital inflows. It is unlikely that global demand for things like oil and copper will subside soon, making it more likely (if unadvisable) that these nations embark on currency controls in order to use their currencies as trade policy weapons.
That would be a gigantic step backwards, and certainly one that virtually all nations would like to avoid. Nonetheless, the opening salvos of a currency war may have already been fired, and it’s up to people like Tim Geithner to understand it.
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