Who’s winning the currency war

Who’s winning the currency war

Those who are worried about currency wars are too late — the wars are already here. China and the United States are both winning the race to cheapen their currencies for now. But if the rhetoric keeps heating up, everyone will be a loser.

American and Chinese officials traded blows over the weekend, setting the stage for a tense G20 summit next month. The head of China’s central bank rejected the idea of a big revaluation for the yuan, advocating a slow-acting “herbal medicine” instead. Treasury Secretary Tim Geithner took a swipe at countries with “significantly undervalued” currencies, of which China is an obvious example.

The United States claims to be a loser in the currency wars. But in reality it is winning. The dollar has fallen sharply against most of its trading partners’ currencies. On a trade-weighted basis, the dollar is the lowest it has been all year, according to the Federal Reserve major currencies index. The likelihood of an imminent bout of money-printing can keep that trend going for a long time.

China, meanwhile, claims not to be a winner. But that is disingenuous too. While the yuan just hit its highest level versus the dollar since officially abandoning its dollar peg in 2005, it has fallen heavily against most other currencies. The euro, the currency of China’s biggest trading partner, has strengthened 14 percent against the yuan. The Japanese yen is not far behind. Various emerging markets, such as Brazil, have also seen their currencies soar.

The gap between winners and losers is widening. With rates as low as can be in the West, money has poured into assets in the East and South. Many Asian stock markets are at multi-year highs — benchmark indices in Indonesia and the Philippines hit records last week. Emerging market bonds too are rallying, as investors scramble for yields. That adds further upward pressure to currencies already out of relative whack with their trading peers.

There is no easy answer. But that, unfortunately, is a fact of life when the world has been living in such an unbalanced way for years. A rate hike in the United States might squash economic growth and leave the world facing another dip. A rapid China revaluation could price the country’s exporters out of the market and lead to widespread unemployment.

A gradual but sustained revaluation of the yuan versus the dollar — combined with a halt to the dollar’s own depreciation — is the least bad way forward. But getting such a deal, as positions become increasingly entrenched, will be tricky. And if both sides refuse to do anything, a currency war could mutate into a trade war — a genuine lose-lose scenario.

Oct 12, 2010

1:12 am EDT

I am a bit lost what the US is trying to achieve over the past 60 years.
An appreciating currency draws investment dollars, creates infrastructure, R&D, and manufacturing and jobs. While a decreasing currency pushes the investment dollar to leave, for better returns.
The US has always pushed to devalue its currency since 1950’s while Europe does the opposite. Europe always wanted a strong currency, and strong MARK and now more so, a strong EURO.
The inflow of investment dollars creates a strong economy, but one has to be careful not to overheat the economy thus the gradual inflows is required.

I remember the proud dollar stood 1:4, today it stands 4:1 The depreciation has been 100 fold.
Europe in general is doing fine, the people live better than people in the USA. (In general) They travel more, and 30 days a year to see the world and can afford it, like US citizens did in 1950’s. Anyone could travel anywhere, the dollar was Almighty.

So here we go again de-valuating the dollar more by printing “QE” instead of allowing it to grow by market forces and production of goods.

Don’t people realize every time the dollar drops your standard of living also drops. Soon you’ll have a basket of worthless paper or the dollar bill will have a few extra Zeros on it. Why do we concentrate on driving down the dollar and wishing a few other countries do the same, instead relying on creating a business friendly atmosphere. The small Mon&Pop hiring 5 to 25 employees will also disappear within the next 5 to 10 years due to over regulation. There is only so much time per day to be productive.

Posted by DDavid | Report as abusive

Oct 12, 2010

6:51 am EDT

Governing wisdom does not have a heart or a mind for new circumstances, and so the assumption that protectionism is BAD might just be a case of pure foolishness.

A protected economy that promotes innovation, true and genuine market economics where every individual is treated as a free thinker, might just be what the USA needs. What is wrong with self-sufficiency? What is wtrong with moral integrity? Circumstances are indeed calling for ecomomists to upgrade themselves with some phylosophy. The West is a place that has its roots in Greek idealism and it will not follow the path of the East without developping fantastic hatred aimed at this purely vicious pragmatism.

Posted by Neander | Report as abusive

Oct 12, 2010

11:07 am EDT

There is no quick fix to this problem. Transfer of technical knowledge has accelerated the relocation of industrial manufacturing. China has low cost labor, the latest state of the art manufacturing machinery, the technical knowledge we provided and oodles of our money. The west has helped China build their industrial juggernaut and major multi-national companies around the world now rely on Chinese manufactured products & components to make a profit and pay dividends. Just because they are now the lowest cost bulk manufacturer of almost everything, we can’t say “Oops we need a do-over. Giving you all that technology was a bad idea”. There is no way to turn the clock back. Greed and a lust for low priced goods created this problem. The Yuan will slowly rise in value as the standard of living improves outside of the main cities in China. They will continue to expand with or without the approval of other counties. China will sell more and more of their manufactured products to developing countries to reduce its reliance on sales to USA and Europe. The west have dug themselves into a huge “debt hole” that will result in a lower standard of living in general and high unemployment. We need to accept the reality of the situation. The USA is printing money in an attempt to patch over the problem. That is also currency manipulation. Too late to single out China as a threat to world stability. A trade war and tariffs will make the situation worse. What if, as retaliation, China decides to more aggressively reduce its purchase of USA Government securities. By choking off imports from China that scenario will be self-fulfilling. And that will result in even higher unemployment.