Currency War Warnings Follow US Fed’s “Quantitative Easing”

There are growing fears that the US Federal Reserve’s policy of “quantitative easing”—the process by which tens of billions of dollars are pumped into financial markets every month—is sparking international tensions over currency values.

One of the consequences of the Fed’s actions is to push down the value of the US dollar, thus worsening the competitive position of other major countries in international markets.

Following the latest decision, in which the Fed gave an indefinite commitment to purchase mortgage-backed securities to the tune of $40 billion per month, the Brazilian finance minister, Guido Mantega, repeated his earlier warnings of a currency war.

Interviewed by the Financial Times last Thursday, Mantega said the US move was “protectionist” and could have drastic consequences for the rest of the world. “It has to be understood that there are consequences,” he told the newspaper. The Fed’s latest move would have only marginal benefits, he said. There was already plenty of liquidity in the economy but it was not going into production. The real purpose of the measures was to depress the value of the dollar and boost US exports, he added.

Mantega pointed to last week’s decision by the Bank of Japan (BoJ) to intervene in financial markets with its own version of quantitative easing as another sign of global tensions. “That’s a currency war,” he said.

In a move clearly aimed at pushing down the value of the yen and lifting Japanese exports, the BoJ decided to add $128 billion to its program of asset purchases. It cited the effects of “financial and foreign exchange market developments” as one of the reasons for its actions.

Further evidence of the impact of global financial turmoil is revealed by Japanese trade figures for last month. These show that exports to Western Europe were down by 28 percent compared to a year ago, with exports to China falling for the third month in a row.

China is also concerned about the impact of the Fed’s actions. The head of the country’s central bank, Zhou Xiaochuan, publicly released criticisms he made last April of the “quantitative easing” program. He said the continued injections of cheap credit were not working and more targeted measures should be developed to get money where it was needed.

China has two concerns about the fall in the value of the American dollar. It tends to push up the value of the yuan, which impacts on Chinese export markets, and reduces the value of the more than $1.2 trillion of US treasury bonds that Beijing holds.

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