As the value of the US dollar declines, currency conflicts increase
Is it a currency war or what?
Fast-growing countries like Thailand are trying to devalue their exchange rates to bolster their export-oriented economies.
In Washington, where the “strong dollar” has been the mantra for years, policymakers are taking action that could further weaken the already weak dollar.
European policymakers fear that a reborn euro threatens growth in their own backyard. And the whole world, it seems, is asking China to level the playing field and allow its undervalued currency, the renminbi, to appreciate. This is a step that Beijing obviously does not want to take.
With so many struggling economies, it suddenly seems that every nation is on its own in the forex markets. Policymakers around the world fear that economic rivals will try to turn exchange rates to their advantage and are thinking about how they should react to preserve jobs and growth in their countries.
Even as Washington berates Beijing over the renminbi, critics accuse the United States and other wealthy nations of waging an international currency war reminiscent of protectionist policies of the 1930s, when nations cared for themselves rather than working together.
“Today there is a risk that the single chorus that tamed the financial crisis will dissolve in a cacophony of discordant voices, as countries increasingly go it alone,” said Dominique Strauss-Kahn, director General of the International Monetary Fund, during a speech. in Shanghai this week. “This, he said, will surely make everyone’s situation worse. ”
The sudden fall of the dollar ?? around 10 percent since early June against major currencies ?? upsets the fragile balance of world economies which are still recovering from the shocks of the financial crisis.
Many other currencies, especially in Asia and emerging markets like Brazil, are soaring due to the falling dollar. The national economies of these countries are attracting speculative capital flows in search of higher interest rates and are in danger of overheating.
The dollar’s decline is driven by what everyone now expects in global markets: a new wave of quantitative easing from the United States. Over the next few weeks, the Federal Reserve is expected to pump huge sums of money into the economy in another attempt to spur growth.
While such policies may benefit the recovering economy of the United States, they also draw criticism that Washington is deliberately devaluing the dollar at the expense of others.
The dollar saw at least a brief rise on Tuesday, as global investors sought the currency as a safe haven after China surprised markets by raising interest rates. But its fall resumed on Wednesday, to a 15-year low against the yen and currencies like the Brazilian real ?? up more than 12 percent since July against the dollar ?? were still high.
The tensions highlight the surprising fact 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 rapidly, while the industrialized economies of the United States, Japan and much of Europe are still struggling .
In Brazil, authorities have been particularly critical of US policy. On September 27, its finance minister, Guido Mantega, first described the monetary tensions as practically a “currency war, a trade war”. This week, the governor of the central bank of Brazil declared that the monetary stimulus measures expected by Washington “create serious distortions”.
By deflecting criticism, the United States is emphasizing 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 a huge accumulation of foreign exchange reserves and a persistent surplus in China’s account equal to about 10.5% of its annual economic output, a surplus which in theory standard monetary policy, would encourage China to allow its currency to rise.
As a result of the link with the dollar, the Chinese renminbi also fell ?? this is one of the reasons why despite the falling dollar, the US trade deficit has continued to widen.
The weakness of the renminbi, like the weaker dollar, has put pressure on the economies of the developing world, where a weaker renminbi undermines their exports, and therefore their growth.
“We are in this monetary conflict because central banks have had to be pushed into the position of policy makers of last resort,” Barry Eichengreen, professor of economics and political science at the University of California at Berkeley, said at the time. of a recent IMF conference. forum.
Financial markets expect the Fed to announce at its meeting early next month that it will proceed with further quantitative easing, involving bond purchases, lowering long-term interest rates and put further downward pressure on the dollar.
This worries other countries. A stronger US economy is in everyone’s best interests, but they fear that investors will shy away from low interest rates and the falling US dollar and instead invest capital in their markets, causing their economies to overheat and create the types of asset bubbles in stocks and housing that burst with such devastating effects in the 1990s.
There is already evidence of this: U.S. investments in foreign equity funds, which stood at around $ 4 billion per month over the summer, have increased since Ben S. Bernanke, the chairman. the Federal Reserve, suggested the possibility of another round of quantitative easing at the end of August. About $ 19 billion has been poured into those funds since Aug. 1, according to TrimTabs, a fund researcher.
In recent weeks, central banks around the world, including those in the Philippines, Thailand, Indonesia, Malaysia, Israel, Taiwan, Brazil and Japan, have intervened furiously in the currency markets in the United States. hope to weaken their own currencies. But equally fast-moving currency speculators so far appear to be largely undermining these efforts by selling their dollars and betting that the US dollar will continue to decline.
In the Chicago futures markets, one of the main arenas where traders can take positions against the currency, positions betting on a depreciating dollar totaled $ 32.6 billion last week, near a record high. , according to investment firm Nomura.
Some countries have gone further than simply criticizing the United States, adopting forms of capital controls to reduce inward investment in the short term. Brazil increases the tax on the money that flows into its bonds. South Korea mentioned the need to control speculative inflows of foreign capital.
Some economists play down fears of currency battles and see dollar movements as a natural readjustment to weaker economic prospects in the United States. The dollar has suffered periodic bouts of weakness before. It strengthened throughout 2008 but weakened in 2009. More generally, it has been declining in the longer term since 2002. Some economists believe that it could recover again soon.
But others fear that by letting the dollar weaken, Washington could fuel dangerous inflationary pressures that will have repercussions around the world.
“The United States has an important role in the global economy to maintain stability and confidence in the dollar,” said John B. Taylor, Stanford economist and former undersecretary for international affairs at the Treasury. “If you lose this, it could be detrimental.”