If the currency fight has been joined in Wellington, can it be anything less than a global war?
That is the renewed concern as more countries react to the ocean of money released into the world financial system by major central banks, and nations with large trade deficits — such as the United States — struggle to boost their own exports.
Exchange rates play an important role in world trade, shaping where companies buy their parts or commodities, determining the prices consumers pay for imported goods, and influencing financial and investment decisions. While savvy international firms have ways to buffer what they do against daily exchange rate movements, the actions of a determined central bank can alter the prospects of nations around the world — acting in effect like a tax or other trade barrier. China’s peg of its currency to the value of the dollar at what many consider an artificially low level, for example, has helped expand its exports by making them cheaper than products from other countries.
Recent steps by Japan, the world’s third-largest economy, have now become a central concern. The impact of the country’s aggressive new monetary policy has been quick and broadly felt — kindling debate over whether the Bank of Japan is using its last resort tools to boost growth, or actively trying to influence exchange rates to give its exporters an advantage. As with any such effort, the concern is that other countries might react in kind — touching off a corrosive competition that leaves everyone worse off.
In a global economic review, PIMCO chief executive Mohamed El-Arian said central banks were pushing the world economy toward a dangerous fork in the road — one path leading to renewed and stable growth, one leading toward crisis and intense competition among countries for shrinking economic returns. To date, he said, the evidence points to loose monetary policy pushing up asset prices and currency values to potentially dangerous levels.
“By venturing deep into experimental policy territory . . . they have inserted a remarkable wedge — a disconnect — between market prices and underlying economic and financial fundamentals,” he wrote.
The yen has fallen sharply against the dollar this year, crossing the threshhold 100 level, and import prices from Japan consequently have fallen for three months running, according to the U.S. Labor Department. Australia and Korea cut interest rates in recent days to try to boost lagging growth, in part out of concern over the rise in the value of their currencies against the yen and the dollar.