Bank of Canada Governor Mark Carney is no complainer: Yes, the policies of the U.S. Federal Reserve have caused the Canadian dollar to rise uncomfortably high, but he says a stronger U.S. economy more than offsets the negatives. Still, he plays the game. “Markets sometimes lose their focus,” he said in October, 2009, a not-so-subtle message to currency traders that he was prepared to make their bet that Canada’s dollar could only go higher a losing one. He also has kept interest rates at 1 per cent or lower for more than four years, in part to offset the loonie’s draw as a haven because of Canada’s relatively solid finances and solid banking system.
Little New Zealand has no choice but to be nimble. It lacks the wherewithal to fight speculative capital flows by creating dollars. “We’d be out in the war zone with a peashooter,” Finance Minister Bill English said in February. Reserve Bank of New Zealand Governor Graeme Wheeler has lowered interest rates, risking a housing bubble. He also said it would be a mistake to view the “kiwi” as a “one-way bet” to appreciate. That suggests he’s willing to intervene to punish short-term speculators. But even Mr. Wheeler admits there’s nothing he can do to stop the broader trend. “Given the strength of recent capital flows, we can only attempt to smooth the peaks,” he said.
Nowhere are tensions higher. North Korea is threatening war. Exporting behemoths such as Samsung Electronics Co. and Kia Motors Corp. are getting hammered by a stronger won. And the government has loudly called on the central bank to weaken the currency. Yet Bank of Korea Governor Kim Choong Soo surprised many this week by leaving the benchmark interest rate unchanged, citing improving economic conditions and an imminent boost from fiscal stimulus. It is possible Mr. Kim is playing a game within a game by asserting his independence from the politicians. If so, it’s a dangerous one. The South Korean economy has grown at an annual rate of less than 1 per cent for seven consecutive quarters dating back to the spring of 2011.
Finance Minister Guido Mantega is one of the wiliest players of the currency game. Move one: Declare a “currency war,” deflecting blame he might take for a struggling economy. Move two: Engineer a near 20-per-cent depreciation in the real over two years through a slew of measures, including taxes on short-term capital, lower interest rates and intervention. Move three: Go to New York, as Mr. Mantega did in February, and declare that the “war” is over, at least for Brazil, where the economy is poised to grow about 3.5 per cent this year, compared with 1 per cent in 2012.
The Swiss National Bank is proving the critics wrong. In September 2011, the SNB pegged the franc to the euro, pledging to create an “unlimited” amount of money to buy foreign currencies. Critics said the Swiss central bank was setting a terrible precedent, courting inflation and instigating a trade war. None of that has happened. Thomas Jordan, the head of the Swiss national bank, said in February that his policies have “nothing to do with a currency war,” and his neighbours believe him. Investors were so eager to flee the euro crisis by seeking safety in Switzerland that they would have crushed the country’s export-driven economy. The SNB has staved off deflation and a recession, although its foreign reserves now are the equivalent of three quarters of gross domestic product.