China’s Tumbling Currency Offers a Rare Glimpse at the Global ‘Currency War’

Guardian economics correspondent Phillip Inman explains that undeclared “currency wars” are indeed taking place between the world’s economic powers, with Europe, China and Japan currently devaluing their currencies and millions of workers in export industries “protected or vulnerable, depending on which side they find themselves.”

Inman writes:

The phrase “currency war” speaks to a seemingly phoney battle between the world’s major trading powers over the price of exports. It has all the attributes of an illusory conflict because no one ever agrees that a genuine dispute has taken place. And as long as everyone denies they have drawn swords to slash their currency to compete with rival powers, talk of a war fizzles and dies.

There is a fringe constituency of analysts who have long argued that, much like the hundred years’ war of intermittent battles between England and France, currency wars make headlines only when there is a lurch in policy, which is the equivalent of deploying archers and unleashing the cavalry.

China’s decision to set its benchmark for the yuan at a five-year low is such a moment. It makes clear what has been true since last August, namely that the Communist leadership believes it needs a low-valued currency to help bail out its ailing export industries. The problem is that everyone wants to use the same trick.

Beijing’s decision followed a similar deployment by the European Central Bank, which last January amassed all its weapons to drive down the value of the euro. The ECB’s reluctant move came after the Japanese central bank did something similar a year earlier. […]

Now the value of the yen is climbing as China devalues. American multinationals are lobbying Congress to complain about the high value of the dollar and British business groups argue that the UK’s recovery is cooling as a result of the high pound against the euro. […]

Admittedly, the US is making the situation worse for its exporters by raising interest rates, which in turn is encouraging more money to pour into its banks from around the world and increasing demand for the dollar, which will raise its value. US manufacturers, which have seen domestic demand soar and are sitting on huge piles of cash, have been told to grin and bear it.

The always bubbling global currency game is a mess of maneuvers and disavowals, wherein policymakers “deny the effects of their proposals if they believe them to be politically unpalatable,” as Inman writes. Read more of his article here.

—Posted by Alexander Reed Kelly.

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