Ex­perts see cur­rency war just get­ting worse af­ter yuan de­ci­sion

The Pak Banker - - BUSINESS -

China's shock move to de­value the yuan risks open­ing a new front in a cur­rency war that stretches from the euro zone to Ja­pan as na­tions look to en­er­gize their economies.

The Peo­ple's Bank of China slashed the yuan's fix­ing by a record 1.9 per­cent on Tues­day, spark­ing the cur­rency's big­gest one-day loss since the of­fi­cial and mar­ket ex­change rates were united in 1994. It trig­gered the steep­est sell­off among Asian cur­ren­cies in al­most seven years, led by slides in South Korea's won and the Tai­wan and Sin­ga­pore dol­lars. The euro and the yen tum­bled 18 per­cent against the green­back in the past 12 months as mon­e­tary poli­cies di­verged in the U.S., Europe and Ja­pan.

"In a weak global econ­omy, it will take a lot more than a 1.9 per­cent de­val­u­a­tion to jump-start Chi­nese ex­ports," said Stephen Roach, a se­nior fel­low at Yale Univer­sity and for­mer Mor­gan Stan­ley non-ex­ec­u­tive chair­man in Asia. "That raises the dis­tinct pos­si­bil­ity of a new and in­creas­ingly desta­bi­liz­ing skir­mish in the ever-widen­ing global cur­rency war. The race to the bot­tom just be­came a good deal more treach­er­ous."

China's de­val­u­a­tion shook global mar- kets just as the cur­rency war ap­peared to be los­ing steam in Asia, with Aus­tralia and New Zealand ton­ing down calls for weaker rates and Ja­pan re­frain­ing from ex­pand­ing stim­u­lus this quar­ter. Even with al­most all ma­jor cur­ren­cies los­ing ground against the dol­lar this year amid ris­ing ex­pec­ta­tions for in­creased bor­row­ing costs in the U.S., China main­tained a de facto peg since March amid a push for the yuan to win re­serve sta­tus at the In­ter­na­tional Mon­e­tary Fund.

"They built into the mar­ket an ex­pec­ta­tion that they were keep­ing the cur­rency sta­ble," said Ray Far­ris, global head of cur­rency strat­egy in Sin­ga­pore at Credit Suisse Group AG. "Then all of a sud­den they blinked. Be­cause they blinked to­day, mar­kets will con­tinue to look for sim­i­lar con­di­tions in the fu­ture. If ex­ports are fall­ing off a cliff, then against the back­ground of this de­vel­op­ment, mar­kets will ex­pect more" de­pre­ci­a­tion, he said.

A re­port on Satur­day showed Chi­nese ex­ports shrank 8.3 per­cent in July, com­pared with a Bloomberg sur­vey's me­dian es­ti­mate of a 1.5 per­cent. The yuan's real ef­fec­tive ex­change rate, a mea­sure ad­justed for in­fla­tion and trade with other na­tions, climbed 13 per­cent over the last four quar­ters and was the high­est among 32 ma­jor cur­ren­cies tracked by Bank In­ter­na­tional Set­tle­ments in­dexes.

The de­pre­ci­a­tion pres­sure on Asian cur­ren­cies from China's ac­tion should fade as the na­tion isn't aim­ing at en­gi­neer­ing a much weaker yuan, HSBC Hold­ings Plc an­a­lysts led by Paul Mackel wrote in a note. Do­ing so would con­tra­dict the goal of pro­mot­ing greater global use of the yuan, they wrote.

More than 20 cen­tral banks from In­dia to South Korea have loos­ened mon­e­tary pol­icy this year to spur growth and fend off de­fla­tion, leav­ing the U.S. and pos­si­bly the U.K. as the only ma­jor

for economies likely to raise rates this year. The con­se­quent dol­lar strength prompted Fed­eral Re­serve of­fi­cials to com­ment on its dam­age to U.S. ex­ports ear­lier this year, cast­ing doubt over whether it would go ahead with tight­en­ing in 2015. "The de­val­u­a­tion sig­nals the PBOC's ea­ger­ness to join the global cur­rency wars," Credit Agri­cole CIB strate­gists led by Valentin Marinov wrote in a note Tues­day. "With the com­pet­i­tive de­val­u­a­tion gain­ing mo­men­tum but global trade slow­ing, the latest yuan de­val­u­a­tion could be seen as likely to force other cen­tral banks to con­sider sim­i­lar mea­sures be­fore long."

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.