As if the global downturn hasn't already given the market the beating of its life, it looks as if another almighty bruising stands between now and the next decade. In fact, it could follow us there and beyond too, warns Mike Baghdady.
past few years, the U.S. has accused China of playing dirty in the
international marketplace by artificially undervaluing the Yuan, saying it's
manipulating its currency by subsidizing its exports.
countries complain they have been pulled into the fray, as victims of a broader
battle to remain competitive in a marketplace that has set new rules of
engagement via currency manipulation.
the U.S. pushes China to raise the value of its currency (so,
among other things it can reduce its huge trade surplus with the world's
fastest growing economy), Japan,
South Korea and Indonesia
among others have intervened unilaterally in recent weeks to curb their
manage their trade deficit, the U.S.
is proposing to set up a target to rebalance global growth and realign or
adjust exchange rates. But there is a growing fear that the current economic
recovery is currently too brittle to support such a move, as export growth in
many developed and emerging markets is largely due to the comparatively low
value of their currencies - a deadlock that may lead the U.S. back to the
'solution' of protectionism.
not forget that in the 1930s, this same protectionism led to a collapse of
trade that set off the Great Depression. And this being mulled, once more, by a
country where it will take nine years to replace the U.S. jobs lost during the
recession, and with another five million jobs needed for its expanding
is surviving by printing more and more currency and through overseas borrowing.
It has to impose huge taxes and prick inflated values where and whenever they
balloon. Whereas, China has
engaged the U.S. in vendor
capital, providing the money that helps finance the huge U.S. fiscal and
trade deficits, allowing Americans to buy more and more goods with the
purported ability to make choices free from fiscal constraints.
it doing with all of this money? The short answer is: saving it. China's
reserves have crossed US$2.6 trillion and are growing by almost a billion
dollars a day, as they buy U.S. dollars and sell yuan to keep their currency
artificially low, with little evidence of movement to the upside.
has barely budged against the dollar since June, rising less than three percent,
after being fixed for two years before that. China argues that letting the yuan
rise any faster would throw its export industry workers out of the domestic
labor market, but at the same time, the undervalued yuan has already driven
millions of Americans out of work, and Japanese too. Europe
has been voicing its own concerns.
there is a chance of the European Central Bank coming out with a Euro
quantitative easing package, which may in turn throw fuel onto the fire of a
currency war. The Europe crisis could play
havoc in the overall markets once more and especially in sectors that have a
direct exposure to the Euro region.
is none of their industries can compete with China's artificially low prices.
And trade deficits with China
continue to advance as a consequence: in August, the U.S.
trade deficit with China
hit a record US$28 billion.
and words may well be the only weapons deployed in this war so far, but the
collateral damage to the trading allies of the U.S. and China - and to people
around the world - is tangible.
threat the U.S.
is using against these countries is if they don't raise the values of their
currencies, the Federal Reserve will continue its policy of quantitative
easing: flooding the markets with cheap money and thereby hanging exporting
nations who compete with one another.
say the Americans' reasoning for China
to raise the value of its currency is a smokescreen because the developing
nation's underpriced exports aren't really competing with anything the U.S. produces.
Either way, when countries try to reduce the value of their currency, they have
to do it by buying U.S. dollars, which drives the greenback's value up.
bank has spent billions selling the yen and buying U.S. dollars to try to slow
down the rise in its currency. It spent $24 billion for an effect that lasted 72
hours a few weeks ago, and there are reports it is considering doing it again.
too, is preparing more moves to defend its currency. "We are ready to take
further measures if there is a new appreciation of the real," said Guido
Mantega, the finance minister, in December. "With the situation in Europe under stress we expect to see a continuation of
the currency war in coming months."
traders, we're bracing for another shake-up as we enter the next decade - with
turbulence, turbulence and more turbulence forecast across the forex landscape.
Are we on the brink of a Currency War?
February 1, 2011