Playing a Dangerous Currency Game
Countries eager to stimulate their economies and boost exports -- the U.S. included -- are on a perilous path
Talk of a global currency war is in the air again. With recovery from the Great Recession so anemic, almost every country is eager to export its way out of the slump. Cheapening one's currency makes that easier, but it also can trigger competitive devaluations, which hurt the world economy. Although that hasn't happened so far, this time there is good reason to be apprehensive.
Last month, Japan began a concerted effort to drive down the value of its yen, hoping to spur enough exports to jolt its economy out of the doldrums. Under orders from Japan's new government, the central bank took a provocative move, easing its monetary policy. The yen plunged sharply -- 10% against the U.S. dollar.
A few days later, Swiss officials declared that although the Swiss franc had plunged since a cap on the currency's rise in value was imposed in September 2011, the value of the currency was still too strong and should decrease further. Because currency traders regard the Swiss franc as a safe haven during troubled times, it soared following last year's collapse of the economies of Greece, Spain and Italy.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The euro also has appreciated sharply, and now some European governments -- most notably France -- contend that the high value of the continent's currency has begun hurting their exports, and have begun to clamor for steps to halt or reverse the rise. Germany so far disagrees.
But the biggest threat comes from the stimulative monetary policies adopted by the industrial countries. They are pushing interest rates down and causing their currencies to slide. The Federal Reserve's "quantitative easing" program is a prime example. Europe and Japan are following suit. Britain may be next.
Although the central banks' main objective invariably is to spur economic growth at home, that inevitably includes a desire to increase exports. And when one country's currency declines in value, others are tempted to deliberately weaken their own currencies, even if it means manipulating the currency markets by buying or selling.
"Japan's devaluation is a game-changer," says David Hale, a Chicago-based global economic consultant formerly with Zurich Financial Services. As the yen declines, Japan will become more competitive in a wide range of industries. "South Korea will then want to weaken its currency, the won," according to Hale. And other Asian countries are likely to follow.
So, although the world hasn't yet become embroiled in an all-out currency war, it is mired in a low-intensity conflict that could easily escalate into a series of tit-for-tat currency devaluations. Ultimately, such policies end up being protectionist and can seriously hurt the global economy.
"The threat of becoming embroiled in a global currency war still isn't high, but it's a clearer and more present danger than it was a year ago," says Larry Greenberg, a former currency analyst for the New York Federal Reserve Bank who now runs a blog called Currency Thoughts. "The temptation for each of these countries has to be pretty big."
Greenberg isn't the only one with an eye out for a possible currency war. The United States and the six other largest industrial nations issued a statement today reaffirming their commitment to allowing the foreign exchange markets to determine the value of their currencies. Further, they insist that their central banks aren't seeking to weaken their currencies when they try to stimulate their domestic economies. The seven, along with 13 other large countries, issued a similar warning in 2012.
Nariman Behravesh, chief economist at IHS Global Insight, argues that, for now, the situation isn't that dangerous. "I don't worry about currency wars if they're forcing countries that have excessively tight monetary policies to be more stimulative," he says. "The worry is if that turns into protectionism. And chances of that aren't high."
But Behravesh warns that if the competitive devaluations get out of hand, they could risk a repeat of what happened in the 1930s, when protectionist pressures (including high tariffs and currency wars) intensified global instability and exacerbated what had then become the Great Depression.
As for the Federal Reserve and other central banks, Behravesh says the bigger challenge is not how they'll avoid competitive devaluations but how they will extricate themselves from their easy-money policies, once their economies begin to pick up speed. What will happen to currencies then?
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
A Financial Checklist for Widows
An interview with a financial adviser about the financial steps widows should take.
By Janet Bodnar Last updated
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published
-
H-1B Work Visa Rules Get a Revamp
The Kiplinger Letter H-1B visas allow employers to hire high-skilled foreign workers. Regulators have finalized new rules for this visa program following last fall's proposal.
By Matthew Housiaux Published
-
Woes Continue for Banking Sector: The Kiplinger Letter
The Kiplinger Letter Regional bank stocks were hammered recently after news of New York Community Bank’s big fourth-quarter loss.
By Rodrigo Sermeño Published
-
Are College Athletes Employees of Their Schools?: The Kiplinger Letter
The Kiplinger Letter A recent ruling has ramifications for labor relations and the unionization of student athletes.
By Sean Lengell Published
-
Salton Sea Clean Energy and Lithium Project Gets Approval: The Kiplinger Letter
The Kiplinger Letter California's Salton Sea is due to see the construction of a new lithium extraction and geothermal clean energy power plant.
By Matthew Housiaux Published
-
More Woes for Anheuser-Busch as a Strike Looms: The Kiplinger Letter
The Kiplinger Letter Drinkers of Anheuser-Busch beers may want to stock up soon. A looming strike threatens to shutter its U.S. breweries later this month.
By Sean Lengell Published
-
The Auto Industry Outlook for 2024
The Kiplinger Letter Here's what to expect in the auto industry this year. If you’re in the market for a car it won’t be quite as daunting as it was during the pandemic and after.
By David Payne Published