Submitted by Kurt Brouwer of Fundmastery
Is a currency war coming?
I have made it clear that I believe the U.S. Treasury wants a weaker dollar. For more on that, see U.S. Treasury seeks weaker dollar. In addition to the post itself, the comment string is very interesting and worth reading.
For different reasons, the Federal Reserve and the Bank of Japan are trying to weaken their respective currencies. China is allowing its currency, the yuan, to strengthen, but not quickly enough for the U.S.
In addition to this potential currency manipulation, we have the Bank of Japan and The Federal Reserve engaging in economic stimulus programs called quantitative easing, which is a new way to debase currency through the digital printing of money.
A central bank two-fer
This amounts to a two-fer for central banks in that they can accomplish two seemingly diverse tasks. It reminds me of an old spoof television commercial showing a couple fighting over whether a product was a floor wax or a dessert topping–”It’s a stimulus program. No, it’s currency manipulation. No kids, it’s both.”
By printing more money, central banks (U.S. and Japan) hope to stimulate moribund economies and this manipulation has the salutary effect of also weakening the currency such that exports are enhanced. Nice.
This MarketWatch.com piece features the thoughts of the International Monetary Fund (IMF) on the current state of play in foreign exchange:
Cooperation on the global economy is “decreasing,” the head of the International Monetary Fund said Thursday, warning countries about the risks of a so-called currency war. Momentum to cooperate on economic policies is “not vanishing but decreasing,” IMF managing director Dominique Strauss-Kahn told reporters ahead of the annual meetings of the IMF and World Bank. He said that falling cooperation is a threat, because “there’s no domestic or national solution to [a] global problem.”
Strauss-Kahn added that some countries consider their currency a “weapon,” and that the “currency war” being talked about by many is a negative thing.
As of yet, we are not in a currency was, but it appears to me that some folks — Treasury Secretary Geithner being one — are itching for a fight. Congress has also gotten into the act. This might make sense in a different economic environment, but it is very foolish now. We really do not need a currency war now and we really do not need further politically-inspired trade restrictions. Either or both are likely to make our economy worse.
Strauss-Kahn spoke to reporters a day after U.S. Treasury Secretary Timothy Geithner effectively blamed China for stoking a currency war.
“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 in a speech in Washington. Read MarketWatch’s coverage of the IMF and World Bank meetings.
World Bank President Robert Zoellick echoed Strauss-Kahn’s comments on Thursday, cautioning that currency tensions could undermine the global economic recovery…
Essentially, Giethner is telling China to go along with our program or else. Anyone, who understands the history of China and of world trade would have to at least admit the possibility that problems will ensue from such a hard line stance.
In a separate MarketWatch.com piece, we see additional information on what is now underway [emphasis added]:
…Brazilian finance minister Guido Mantega said a currency war has broken out, and the head of the IMF, Dominique Strauss-Kahn, warned of the risk of one if governments try to use exchange rates to solve domestic problems.
“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Strauss-Kahn said in a Financial Times interview.
Geithner and other developed country officials say the fast-growing, reserve-rich emerging market economies need to let their currencies strengthen but the leading emerging nation, China, has by and large resisted efforts to allow its currency to strengthen. (Brazil too has put up barriers.) In late June, China took steps to allow more movement in its currency, the yuan, but the currency has only appreciated about 2% vs. the dollar since then…
The yuan has appreciated 2% since June against the dollar, but that is not enough for some. As you could see from the comments thread on the post I mentioned in the first paragraph, there are different points of view on this issue.
However, I would hope that our central banks stop short of actually inciting a currency war, which would almost certainly escalate into a trade war.