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 wants to admit 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 more cheaply 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’s tweets and the actions of his administration 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 at various times 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 starting to get his own way, as the Federal Reserve backtracked on interest rate hikes that had put pressure on the dollar to strengthen. As the U.S. and China traded blows with tit-for-tat tariffs, China allowed the yuan to weaken below the symbolic level of 7 to the dollar — a line it hadn’t crossed in over a decade — raising alarms that the currency might be “weaponized” and prompting the U.S. Treasury Department to officially brand China a currency manipulator. China’s central bank rejected the allegation, saying the market had determined the yuan’s recent depreciation and that the U.S. move to label it a manipulator would cause global financial turbulence.
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. Foreign exchange wars have 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. Japan is often considered a clear winner in the battle for competitiveness 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 dropped the gold standard that had pegged their currencies to the metal’s value. 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.
Currency tensions can be seen mainly as 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 the Group of 20 countries have repeatedly pledged at their regular meetings not to target exchange rates for competitive reasons, though they have stopped short of criticizing nations for doing so. With the explosion of global trade tensions, the U.S. and other countries look increasingly willing to use their currencies as leverage and shift the fight to the foreign-exchange markets. Even the threat of such moves can provoke price swings, whipsaw capital flows and fuel volatility. Trump’s moves show 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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