Euro weak­ness sparks an­a­lyst clash over cur­rency war


The euro’s slide against the U.S. dollar has reignited talk of a “cur­rency war,” with an­a­lysts in op­pos­ing camps over whether or not coun­tries are con­sciously play­ing with their ex­change rates.

War lan­guage is no stranger to mod­ern mon­e­tary pol­icy.

The mas­sive bond buy­ing pro­grams, or quan­ti­ta­tive eas­ing (QE), that cen­tral banks have used in re­sponse to the fi­nan­cial and eco­nomic crises that have rocked the global econ­omy since 2008 are of­ten re­ferred to as a bazooka.

Af­ter low­er­ing in­ter­est rates, some­times to zero or even into neg­a­tive ter­ri­tory, ma­jor cen­tral banks turned to buy­ing gov­ern­ment and cor­po­rate bonds to stim­u­late the econ­omy.

First tried by Ja­pan in 2001 to com­bat de­fla­tion, the U.S. Fed­eral Re­serve be­gan us­ing it in 2008 to re­spond to the fi­nan­cial mar­ket cri­sis and pull the U.S. econ­omy out of re­ces­sion.

Ja­pan used QE with more suc­cess in 2013 af­ter Shinzo Abe came to power, and the Euro­pean Cen­tral Bank joined the party in March.

Mon­e­tary Pol­icy Bazooka

But cen­tral banks fired this bazooka as gov­ern­ments had lit­tle they could do.

“We are re­ally in a sit­u­a­tion where mon­e­tary pol­icy has sub­sti­tuted for bud­getary pol­icy” as “the gov­ern­ments don’t have any more bud­getary mar­gin for ma­neu­ver,” said Saxo Banque econ­o­mist Christo­pher Dem­bik.

And the bazooka wasn’t di­rectly aimed at ex­change rates.

The bond pur­chases in­ject money into the econ­omy, thus ad­dress­ing any con­cerns about mar­ket liq­uid- ity. To the ex­tent the funds re­sult in new in­vest­ments in the real econ­omy it stim­u­lates growth, an­other aim of QE poli­cies.

But some funds end up leav­ing the coun­try as in­vestors seek bet­ter re­turns else­where. This pushes the value of the cur­rency down, which is also not an un­wel­come ef­fect for pol­i­cy­mak­ers as this fa­vors more ex­ports of goods and ser­vices and thus growth.

“The cur­rency weapon is rarely the of­fi­cial ob­jec­tive,” said Pa­trick Jacq, a bonds spe­cial­ist at BNP Paribas bank.

Led by Brazil, de­vel­op­ing coun­tries charged that the U.S. QE pro­gram was a first shot in a cur­rency war be­cause their economies suf­fered as ex­ports slumped thanks to the weak dollar.

Those com­plaints were brushed aside with com­mit­ments by the lead­ing economies to “mar­ket- determined ex­change rates.”

But public com­ments from elected of­fi­cials about cur­rency val­ues of­ten muddy the wa­ters about pol­icy ob­jec­tives, even if cen­tral banks in most ma­jor economies are in­de­pen­dent.

Low­er­ing a cur­rency’s value may not be the stated pol­icy ob­jec­tive “but they are think­ing it so loudly all the world hears it,” said Rene Des­fos­sez, a bonds spe­cial­ist at Natixis in­vest­ment bank.

The rea­son is clear as “the ex­change rate is one of the prin­ci­ple levers on which they can use to make mon­e­tary pol­icy as fa­vor­able as pos­si­ble for eco­nomic re­cov­ery.”

A weak cur­rency can pro­vide a boost to ex­ports, and thus con­trib­ute to a wider eco­nomic re­cov­ery if com­pa­nies raise wages and cre­ate new jobs.


Pol­icy Free-for-all



chief econ­o­mist, Erik Nielsen, ob­served re­cently that days of “gen­tle­manly” co­op­er­a­tion be­tween cen­tral banks is long gone.

“I am not in the ‘ cur­rency war’ camp, but it is im­por­tant to note that the world’s lead­ing cen­tral bankers are now mak­ing it ex­plic­itly clear that they run mon­e­tary pol­icy for their own coun­try only,” he said in a note to clients.

“And while the cur­rency is not an ex­plicit ob­jec­tive in their pol­icy set-up, the FX is seen — and ex­plic­itly re­ferred to — as an in­te­gral part of cre­at­ing the de­sired fi­nan­cial con­di­tions for the do­mes­tic economies.”

More coun­tries have been join­ing on the eas­ing bandwagon, ei­ther on their own ini­tia­tive or in re­sponse to oth­ers.

The Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment noted re­cently that mon­e­tary pol­icy in coun­tries ac­count­ing for roughly half of global out­put had been eased in the past few months.

‘Not nec­es­sar­ily war­fare’

But is it a cur­rency war? Ed­i­tors at Bloomberg re­cently wrote that “this isn’t nec­es­sar­ily war­fare.”

The eu­ro­zone, Ja­pan and China all have am­ple jus­ti­fi­ca­tion for mon­e­tary stim­u­lus, they noted.

One way of un­cov­er­ing un­fair cur­rency ma­nip­u­la­tion, Bloomberg ed­i­tors said, is to look at for­eign re­serves, which should in­crease if a coun­try is de­lib­er­ately buy­ing for­eign cur­rency to keep the value of its cur­rency low.

But no ma­jor coun­try has been mas­sively hoard­ing for­eign re­serves, ac­cord­ing to Bloomberg data.

The mas­sive swings in cur­ren­cies in re­cent months — the U.S. dollar has ap­pre­ci­ated by a quar­ter against a bas­ket of ma­jor cur­ren­cies since Au­gust — may be due more to mon­e­tary and eco­nomic dis­so­nance.

While the eu­ro­zone and much of the rest of the world are eas­ing mon­e­tary pol­icy, the United States is on the cusp of rais­ing in­ter­est rates from the zero level where they have been for more than six years.

The prospect of higher re­turns on U.S. bonds caused a brief stam­pede out of emerg­ing mar­kets last year, and with much of eu­ro­zone debt now pro­vid­ing lit­tle if no re­turn, the euro has been slump­ing against the green­back.

“As we have said for over a year now, the di­ver­gence in cen­tral bank poli­cies is cru­cial to where th­ese cur­ren­cies move now,” said Greg Smith, an an­a­lyst at cur­rency trad­ing firm World First.

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