Currency Wars?


Ambrose Evans-Pritchard thinks it's in the cards: 
The Telegraph
16 Sep 2010

“We are very concerned about the negative impact of (China’s) policies on our economic interests,” he told a Congressional hearing on Beijing’s use of exchange intervention for trade advantage.

“The pace of appreciation has been to slow. The undervalued renminbi helps China’s export sector. It encourages out-sourcing of production and jobs from the United States. By continuing a rigid exchange rate, China is impeding the adjustments needed to secure sustainable global growth,” he said.

The tough talk comes amid concerns that the global currency order is unravelling, with countries breaking ranks in a `beggar-thy-neigbour’ use of 1930s-style devaluation to help exporters and shore up their economies.

Japan became the latest country to intervene this week, carrying out massive dollar and euro purchases to weaken the yen. Sander Levin, chair of the US House Ways and Means Committee, called the move “deeply disturbing”, chiefly because it muddies the political water and lets China off the hook.

Mr Geithner’s ire follows a move by US trade chief Ron Kirk to file two cases against China at the World Trade Organization, alleging bias against US steel producers and credit card companies. Mr Kirk said he was “fighting for the American jobs threatened by China’s actions.”

Trade expert Gary Hufbauer from Washington’s Peterson Institute said the tensions risk triggering a dangerous clash.” The US and China are now adversaries, not enemies, but if the Obama administration pushes this trade agenda the way it is now doing, we will end up antagonists,” he said.


There are few saints in this global currency game. Sterling has dropped by 20pc since the credit crisis, a side-effect of low interest rates. The US Federal Reserve has been “steering” the dollar lower. But the Anglo-Saxon duo they at least have trade deficits.

It is very different when surplus states such as China intervene to prevent trade adjustment. They are in effect exporting surplus capacity, and starving the world of demand. This is a recipe for global slumps.

Japan’s leaders say privately that China’s actions have begun to threaten their country’s industrial base, forcing Tokyo to respond with its own solo intervention or stand by as its exporters are asphyxiated and its economy tips into a deflationary spiral.

The twist is that Japan itself has a large trade surplus -- though for different reasons -- so it is in effect passing the unwanted parcel to the US and Europe rather than allowing the global system to come back into equilibrium.

If Britain and the US launch decide to a launch fresh blast of monetary stimulus, they in turn may succeed in passing the parcel back again. Economists say this is not a healthy way to run a global currency system.