A peace accord remains a long way off, but the outlines of a truce are starting to form in the global row over currencies.
China allowed the yuan to rise to a record against the U.S. dollar and Singapore’s central bank loosened its grip on that country’s currency, presenting a glimmer of hope that tensions over foreign-exchange rates can be eased before they spark a trade war.
Foreign-exchange markets were a frenzy of activity again Thursday, as the dollar tumbled to a new 15-year low against the yen, the loonie flew past parity with its U.S. counterpart and the Australian dollar drew nearly even with the greenback for the first time in three decades. The Canadian dollar closed at 99.4 cents (U.S.)
The decisions by China and Singapore to allow greater appreciation are significant because East Asia’s export-dependent nations have been reluctant to allow the value of their currencies to rise in tandem with their fast-growing economies, an issue that has been at the heart of what Brazil’s finance minister on Sept. 27 called an international “currency war.”
China’s stubborn accumulation of foreign-exchange reserves is combining with ultra-loose monetary policy in the United States to disrupt normal investment flows.
With the U.S. Federal Reserve contemplating creating hundreds of billions of dollars to buy financial assets, there is little prospect of turning a quick profit in the world’s largest economy. International investors would love to exploit China’s white-hot economy, but the government’s policies block them from taking full advantage.
As a result, investors are flocking to whatever country offers yield, whether that be a country such as Brazil, the strongest economy in Latin America, or one such as Canada, where the central bank has been raising interest rates and the finances are relatively sound.
The labelling of the tensions as a “currency war” by Brazilian Finance Minister Guido Mantega might have been an exaggeration, since evidence suggests countries are fighting against volatility in foreign-exchange markets rather than actively seeking to undermine their trading partners.
Still, no one denies that anxiety is running high.
Countries on the periphery of the world’s largest economies aren’t keen about accepting stronger currencies either. That’s increasing the risk of what Canadian Finance Minister Jim Flaherty on the weekend called a “cacophony” of retaliatory measures that would disrupt trade and choke the recovery.
Finance ministers and central bankers, who failed to ease tensions at meetings in Washington last week, must try again when they gather in Gyeongju, South Korea, next week for a Group of 20 meeting, South African Finance Minister Pravin Gordhan said Thursday.
Echoing his Brazilian counterpart, Mr. Gordhan told lawmakers in Cape Town that the world is headed for a “currency war” unless the G20 gets “the major players to sit around the table and find a spirit of co-operation and generosity and give and take,” according to an account of his remarks by Bloomberg News.
East Asian countries, including Thailand and South Korea, are aggressive managers of their exchange rates, seeking to keep them relatively weak as part of their export-driven growth strategies that result in wide trade surpluses.
China points its finger at the Federal Reserve, suggesting that its policy is really meant to weaken the dollar. The thought surely registers with Fed officials, but the accusation underplays the damage that would be wrought if the U.S. slipped back into recession.
Another problem with China’s argument is that it distracts from the fact that it is emerging markets that are doing the intervening. According to Jens Nordvig of Nomura Securities, emerging-market countries have spent more than 7 per cent of their aggregate gross domestic product this year intervening in foreign-exchange markets, compared with 0.6 per cent of GDP by advanced economies. “The ‘currency war’ really is about the big surplus countries in the world, especially China,” Mr. Nordvig, who is based in New York, said in a report Thursday.
