Real wars have guns, and trade wars are fought with weapons such as tariffs. Currency wars, on the other hand, are stealth battles — no country ever admits that it’s waging one. They surface when policy makers are accused of deliberately driving down exchange rates — or fixing them too low — to gain a competitive advantage. A weaker currency means a country’s exports can be sold cheaper overseas, providing a jump-start to the economy at home. Things really heat up, though, when suspicious nations retaliate. After years of largely unspoken tensions, U.S. President Donald Trump and his tweets have brought hostilities into the open, raising concern about an unraveling of decades of global pledges to refrain from combat using currencies.
U.S. officials have accused China, Germany, Russia and Japan of gaining an advantage by acting to keep their currencies undervalued. At the same time, Trump has been moving away from the decades-long “strong dollar” policy by saying he’d prefer a weaker currency as a way to increase exports, narrow the trade deficit and boost profits for U.S. companies. He might be fighting a losing battle, as rising U.S. interest rates put pressure on the dollar to strengthen. As the U.S. and China traded blows with tit-for-tat tariffs, China allowed its currency, the yuan, to slide more than 8 percent against the dollar in the six months ended in September. Although economists said there were fundamental reasons for the move — including slower economic growth in China — the timing raised alarms that the currency might be “weaponized.” Before the most recent spats, the currency wars had simmered for years as countries fought their way out of the recession triggered by the 2008 financial crisis and more central banks embraced unconventional monetary policies. The U.S., Japan and Europe were among those that used bond-buying plans in addition to interest-rate cuts to stimulate their economies, leading to allegations that the moves were driving up currencies in other countries.
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, as money seeking higher interest rates flowed into emerging markets, driving up currencies in those countries and making their commodity exports more expensive around the world. Japan is often considered a clear winner after the yen lost a third of its value against the U.S. dollar from the start of 2012 to the end of 2014, propelling profits for companies such as Toyota Motor Corp. China inflamed critics for more than a decade by refusing to allow the yuan to strengthen as cheap exports fueled an economic boom. Trump targeted the country’s exchange-rate regime during his presidential campaign in 2016, even though by that point China had shifted to a policy of propping up the currency to stem capital flight. 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, the Bretton Woods system prevented a repeat of such beggar-thy-neighbor strategies by linking the value of many currencies to the U.S. dollar.
The tensions can be seen as mainly spillovers from other policy moves to stimulate economic growth. Most large countries allow market forces to determine exchange rates, so deliberate devaluations are rare and hard to achieve. Since 2013, finance ministers from Group of 20 have repeatedly pledged at their regular get-togethers not to target exchange rates for competitive purposes, though they have stopped short of criticizing any nation for doing so. With the explosion of global trade tensions, the U.S. and other countries might be more willing to consider their currencies as leverage and shift the fight to the foreign-exchange markets. The threat of such moves can provoke price swings, whipsaw capital flows and fuel volatility. Trump’s rhetoric shows that the era of cooperation may be a thing of the past.
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First published April 14, 2015
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