Central bankers and finance ministers 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 — or fixing them too low — so that goods made by their exporters can be sold cheaper overseas, providing a jump-start to the economy at home. When other nations retaliate, it ignites a currency war. Central bankers say they’re not trying to pick fights. Rather, they’re keeping a hold on interest rates or taking other steps to stimulate economic growth. That creates spillover, however, as money flees for countries with higher rates, pushing currencies upward and hurting exporters. Whether intentional or not, these unspoken currency wars still create peril — and real winners and losers.
President Donald Trump and other U.S. officials have accused China, Germany, Russia and Japan of gaining an advantage by keeping their currencies weak. Trade tensions were said to prompt China to consider depreciating the yuan as a tool in negotiations, after letting it gain in value against the dollar for several years. At the same time, Trump has been nudging the dollar lower as a way to increase exports, reduce the trade deficit and boost profits for multinational companies. Before these spats, the currency wars had simmered for years as countries fought their way out of the recession triggered by the 2008 financial crisis. As more central banks embraced unconventional monetary policies to protect their economies, the race to the bottom took on new momentum. The U.S., Japan and Europe used bond-buying plans in addition to rate cuts to stimulate their economies. Japan jolted markets by introducing negative interest rates in 2016, following the European Central Bank’s move below zero in 2014.
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 has been 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 Motor Corp. 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 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 G-20 group of countries regularly renews a pledge to refrain from competitive currency devaluations, though it has stopped short of criticizing any nation for doing so. With recent political shifts, especially in the U.S., some countries appear more willing to openly use their currencies as leverage in global trade. The fallout from such moves can rattle markets, whipsaw capital flows and fuel volatility. Some countries, including China, use currency pegs to stabilize their exchange rates, since currency fluctuations create uncertainty and can crimp investment. China’s surprise 2015 devaluation of the yuan — the first in more than two decades — prompted calls for clearer communication and a more united stance from the world’s central bankers. There’s a debate about how long the world’s economies can fight, and how they might make peace in the currency wars.
First published Feb.
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