Cur­rency wars

The Pak Banker - - OPINION - Lucy Meakin

CEN­TRAL bankers aren't usu­ally the ones who fight wars. But the global econ­omy is a dan­ger­ous place, full of threats to pros­per­ity. That's given rise to the idea that there's a tus­sle for com­pet­i­tive ad­van­tage go­ing on, with each coun­try bran­dish­ing its cur­rency as a weapon. The stan­dard view as­sumes pol­icy mak­ers are driv­ing down ex­change rates so that goods made by their ex­porters can be sold cheaper over­seas, pro­vid­ing a jump­start to the econ­omy at home. When other na­tions re­tal­i­ate, it ig­nites a cur­rency war. Cen­tral bankerssay they're not try­ing to pick fights. Rather, they're cut­ting in­ter­est rates and tak­ing other steps to stim­u­late growth. That creates spillover, how­ever, as money flees for coun­tries with higher rates, push­ing cur­ren­cies higher and hurt­ing ex­porters. Whether in­ten­tional or not, th­ese un­spo­ken cur­rency wars still cre­ate peril - and real win­ners and losers.

The bat­tle erupted again af­ter China's sur­prise de­val­u­a­tion of the yuan in Au­gust and a fur­ther slide in the cur­rency in early 2016. The moves raised con­cern that China would de­pre­ci­ate the yuan to re­vive a slow­ing econ­omy, prompt­ing de­nials from Chi­nese of­fi­cials. Ja­pan also jolted mar­kets by in­tro­duc­ing neg­a­tive in­ter­est rates, fol­low­ing the Euro­pean Cen­tral Bank's move below zero in 2014. At least 24 coun­tries cut in­ter­est rates last year, with na­tions from Canada to Sin­ga­pore un­ex­pect­edly eas­ing mon­e­tary pol­icy. The cur­rency wars have sim­mered for years as coun­tries fought their way out of the re­ces­sion trig­gered by the 2008 fi­nan­cial cri­sis. The U.S., Ja­pan and Europe used bond-buy­ing plans in ad­di­tion to rate cuts to stim­u­late their economies. As the re­cov­ery limped along, cen­tral bankers eased pol­icy fur­ther to ward off de­fla­tion, or a drop in prices that can crip­ple spend­ing and sap growth. Who's tak­ing the hit? Mainly the U.S., where the first in­ter­est rate in­crease in al­most a decade pushed the dol­larhigher against all 16 of its ma­jor peers in 2015.

The bat­tle erupted again af­ter China's sur­prise de­val­u­a­tion of the yuan in Au­gust and a fur­ther slide in the cur­rency in early 2016. The moves raised con­cern that China would de­pre­ci­ate the yuan to re­vive a slow­ing econ­omy, prompt­ing de­nials from Chi­nese of­fi­cials. Ja­pan also jolted mar­kets by in­tro­duc­ing neg­a­tive in­ter­est rates, fol­low­ing the Euro­pean Cen­tral Bank's move below zero in 2014. At least 24 coun­tries cut in­ter­est rates last year, with na­tions from Canada to Sin­ga­pore un­ex­pect­edly eas­ing mon­e­tary pol­icy. The cur­rency wars have sim­mered for years as coun­tries fought their way out of the re­ces­sion trig­gered by the 2008 fi­nan­cial cri­sis. The U.S., Ja­pan and Europe used bond-buy­ing plans in ad­di­tion to rate cuts to stim­u­late their economies. As the re­cov­ery limped along, cen­tral bankers eased pol­icy fur­ther to ward off de­fla­tion, or a drop in prices that can crip­ple spend­ing and sap growth. Who's tak­ing the hit? Mainly the U.S., where the first in­ter­est rate in­crease in al­most a decade pushed the dol­larhigher against all 16 of its ma­jor peers in 2015.

Brazil­ian Fi­nance Min­is­ter Guido Man­tega gave the cur­rency wars their name in 2010 when he de­nounced what he saw as the de­lib­er­ate pur­suit of weaker cur­ren­cies. His coun­try had been an early ca­su­alty in the fight, af­ter lower U.S. rates sent money flow­ing into emerg­ing mar­kets, mak­ing Brazil's com­mod­ity ex­ports more ex­pen­sive. One big win­ner was Ja­pan, as the yen lost a third of its value against the dol­lar from the start of 2012 to the end of 2014, pro­pel­ling prof­its for com­pa­nies like Toy­ota. The most fa­mous frenzy of com­pet­i­tive de­val­u­a­tions came dur­ing the Great De­pres­sion of the 1930s, as coun­tries aban­doned the gold stan­dard that had pegged their cur­ren­cies to the value of the metal. Un­til its col­lapse in 1971, theBret­ton Woods sys­tem pre­vented a re­peat of such beg­gar-thy-neigh­bor strate­gies by link­ing the value of many cur­ren­cies to the dol­lar. Over the last decade, China has faced crit­i­cism for hold­ing down the value of the yuan, as cheap goods helped trans­form the coun­try into an ex­port­ing pow­er­house. The de­val­u­a­tion of the Chi­nese yuan - the first in more than two decades - prompted calls for clearer com­mu­ni­ca­tion and a more united stance from the world's cen­tral bankers. The G-20 group of coun­tries reg­u­larly re­news its pledge to re­frain from com­pet­i­tive cur­rency de­val­u­a­tions, though it has stopped short of crit­i­ciz­ing any na­tion for do­ing so.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.