There are no rules, only unofficial guidelines. The Group of Seven industrialized nations have a convention that no member will intervene in foreign exchange markets without the consent of the others. The countries that comprise the Group of 20 say they oppose competitive devaluation and that they will take into account the international implications of their domestic economic policies. The International Monetary Fund monitors the global economy, but only has direct influence over the countries that come to it for bailouts.
THE UNITED STATES
“We are not engaged in a currency war,” Federal Reserve Board chairman Ben Bernanke told U.S. lawmakers at the end of February. “Our monetary policies, which are being replicated in other countries, are increasing demand globally and helping not only our businesses, but also the businesses in other countries that export to us.” Mr. Bernanke’s critics call that a self-serving assessment, but those critics steadily have become fewer in number. Mr. Bernanke is determined to avoid the mistakes of the Great Depression, which he thinks was worsened by policy makers who doubted the power of monetary policy. Still, as the biggest player, there’s no denying the Fed dictates the terms of the game.
The Bank of England has done everything it is legally allowed to do. It dropped its benchmark lending rate to rock-bottom levels, and it has created hundreds of billions of pounds to purchase financial assets, all while letting inflation run in excess of its 2-per-cent target. Yet the economy has been in and out of recession since the crisis. What is a government to do? Change the law. Chancellor of the Exchequer George Osborne rewrote the Bank of England’s remit, calling for “monetary activism,” so long as inflation doesn’t get too hot. Mark Carney, who takes over the British central bank in July, won’t be sitting on the sidelines.
“As the largest foreign holder of U.S. Treasury securities, China is able to influence global currency trends at leisure,” Tuuli McCully, an analyst at Bank of Nova Scotia, wrote in March. If the currency game ever gets truly nasty, it will be because China, the world’s second-largest economy and among the fastest growing, refuses to let the yuan appreciate faster. Much of the capital pressure on countries such as Brazil, Canada and Chile is coming from China, which maintains strict financial controls and a tether on its currency. Yet those countries can’t yell too loudly. China’s demand for the commodities is the main reason they escaped the financial crisis relatively easily.
THE EURO ZONE
The region’s debt crisis put plenty of downward pressure on the value of the euro, as international investors bet the currency union would collapse. It hasn’t, largely because the European Central Bank embraced its role as lender of last resort. ECB officials are adamant that the euro’s value is of secondary concern; their fixation is inflation. The currency’s value, of course, influences inflation. ECB president Mario Draghi commented in early February that the euro’s gains at the time could affect the economic outlook. Traders got the hint. The currency promptly fell the most in seven months.
Japan is hard to figure out. For years, the country’s officials talked about wanting a weaker yen, but only rarely did the central bank or the government attempt to do anything about it. The chatter irritated some trading partners. But for a country that has struggled with deflation for two decades, the willingness to endure an overvalued currency was remarkable. Japan no longer is a passive player. The Bank of Japan will create the equivalent of about $500-billion (U.S.) a year to purchase financial assets until it hits a new inflation target of 2 per cent. The yen has tanked, as Japan has become an inhospitable host for haven-seeking investors. Yet most of its trading partners applaud the move, predicting a revival of the world’s third-largest economy.