My thoughts on the ‘currency war’
I spoke to the Russian TV broadcaster Russia Today and the popular Indian website DNA India late last week about the escalating rhetoric surrounding the forex market. The video from RT is not available yet but the link to the DNA post is right below. Let me summarize my view.
I believe the developed economies are already in a nascent currency war because domestic demand growth is weak in both countries with external surpluses (exporters) as well as those with external deficits (importers and consumers of last resort). The consumption demand weakness in developed markets has led to a zero-sum mentality which is dangerous and which risks escalating. Countries like Switzerland and Japan are attempting to stop their currencies from becoming more overvalued, while the U.S. is attempting to increase its currency’s undervaluation. The result has been a flood of liquidity in the developed economies. When the Brazilian finance minister voiced concern, it was clear that emerging markets were concerned that the flood of money produced by the developed economies was going to destabilise emerging market economies as well.
Policy makers need to take a step back and consider the risks of escalating rhetoric because they will find themselves with a significantly reduced set of policy options if it continues in this fashion.
Source: Bashing China and going to currency war is wrong and risky: Former US diplomat – DNA India
Update: Comments from Lagarde, Stiglitz, Roubini and Eichengreen in the Wall Street Journal video below are in line with my thoughts here about the need for less public rhetoric and more of a multilateral behind-the-scenes approach. I am sceptical hat we will get this. But it is what we should want.
This is definitely a concern here in Chile, where verbal hints of some kind of intervention have been dropped by the executive, putting them somewhat at odds with the independent central bank:
https://www.latercera.com/noticia/negocios/2010/10/655-298566-9-la-intervencion-cambiaria-de-pinera-que-incomodo-al-banco-central.shtml
I don’t know whether they’re considering a comeback of the encaje, a mechanism discussed on this site a few weeks ago for Brazil. But fruit exporters are saying they need the USD at/above 570 to be competitive. Some people are saying that, well, maybe fruit growers need to become more productive. For context, Peru has grown as the low-cost alternative in the region these past years, while Piñera said he was committed to growing Chile’s agro/forestry business:
https://www.latercera.com/noticia/negocios/2010/10/655-298568-9-la-principal-exportadora-de-uva-mira-a-peru-tras-caida-del-dolar.shtml
I saw Hass avocado imported from Peru a few weeks ago in the supermarket, and I live in avocado land (when you buy Chilean avocado in the US, more likely than not they’re coming from the Quillota valley next to where I live). Granted, the winter has been especially cold, but this is very unusual. Chile imports bananas or pineapple, they’re used to *exporting* avocado! As the dollar gets under 500 CLP, there’s little but copper that Chile can export successfully. Break below 450 and you’ve got Dutch disease.
Seeing how Mexico is selling 100-year bonds, maybe Chile is going to refinance more of its (low) public debt in pesos in the future (they recently sold $500M worth of their treasuries in CLP for the first time). We don’t have a drug war going on here!