Friday 29 Mar 2024
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ANYONE paying attention to financial media could easily get the impression that the world is hell-bent on stealing the US economic recovery. Central banks from Frankfurt to Beijing, as the story goes, are pushing down their currency exchange rates against the US dollar — and against one another — in a craven effort to make their exports cheaper.

Lest this “currency-war meme” leads politicians to do anything inadvisable, let’s be clear — it’s a load of baloney.

True, there have been a lot of action lately in foreign exchange markets. Even as the US Federal Reserve moves towards raising interest rates, policymakers in other major economies — Europe, Japan and China — have been pushing their rates down, sometimes into negative territory.

This has led investors to seek better returns on US dollars, causing the currency’s trade-weighted value to rise more than 14% over the past eight months and squeeze US exporters such as Caterpillar and Procter & Gamble.

Policies of central banks affect currencies, but it is not necessarily warfare. Much depends on the motives. Unfair manipulation involves resisting upward market pressure on the currencies, just like China did throughout much of the early 2000s. The aim of the policy, you could say, is to keep the foreign exchange market out of equilibrium. Easing monetary policy to stimulate a flagging economy is quite different — even if it gives exports a boost as a by-product.

The euro area, Japan and China all have ample justification for monetary stimuli. If anything, the European Central Bank waited far too long to deploy quantitative easing to fight the region’s economic malaise.

Japan is struggling to emerge from its third recession in four years. China is trying to manage slowing growth and deflationary pressures.

There is even less reason to suspect trade-related motives in other emerging markets, where currencies have been plunging too. Central banks in Russia, Brazil and elsewhere have actually been struggling to stem sharp declines in exchange rates, brought on by a combination of Western sanctions (in Russia’s case), falling oil prices and investor concerns about companies’ ability to pay their debts.

One way to check for unfair manipulation of exchange rates is to look at foreign reserves. Typically, manipulators buy foreign currencies to keep their exchange rates artificially low, so that their reserves grow. Since the US dollar started rising in mid-2014, reserves in the euro area, Japan, China and most significant emerging markets have stayed flat or even declined.

Japan, China and the main emerging-market economies are not engaged in currency warfare. Currencies are shifting because economies are diverging, and the bogus rhetoric of economic conflict is dangerous as well as wrong because if it leads governments to restrict trade, everybody will lose.

What’s actually needed is closer cooperation on economic policies. That would lift some of the burden of adjustment from monetary policies and exchange rates, which have been asked to do too much.

Governments repeatedly pledge to coordinate their policies more effectively — they trot this out at every Group of 20 summit — but never get around to it. That is a pity but following the currency-war nonsense would be an even worse mistake. — Bloomberg View


This article first appeared in The Edge Financial Daily, on March 17, 2015.

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