Will the Export Economy Spark a Global Currency War?

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currencyIn a fragile economy, every country wants to expand its exports, and low currency values can help make products cheaper to international buyers. Could countries' efforts to stay competitive be sparking a currency war?

Some signs of conflict have already popped up. For example, the U.S. is pushing China to allow the yuan to rise, with Congress scheduled to consider a measure that could lead to retaliation this week. Earlier this month, the Japanese government sold yen to lower that currency's value, drawing some international criticism.

Brazil, which has intervened heavily throughout September to stem the growing value of its currency, warned on Sept. 20 that it's considering even stronger action. And Mexico also has been buying foreign currency as its peso has appreciated, although it cited a desire to boost its reserves -- not depreciate its currency -- as its motivation.

With many currencies heading downward, the price of gold hit a record of more than $1,300 an ounce Friday, a sign that investors are seeking a safe haven.

"We're in an export economy, therefore, the incentive is to have the lowest currency possible to boost your exports," says Brian Kelly, president of Darien, Conn.-based investment adviser Kanundrum Capital. "So when times are tough like you're seeing in Japan, their incentive is to devalue their currency. The problem is not everyone can do it all at once."

Too Early to Call the Conflict a War?

Much of the latest maneuvering has involved Japan and China, which is Tokyo's largest trade partner. Because China's currency is closely linked to the dollar, when the dollar goes down against the yen, so does the Chinese yuan. China bought Japanese bonds, which helped force up the yen, Kelly says. Now that the Japanese have sold yen to buy dollars, the Chinese are selling dollars and diversifying into other currencies, he says.

But all that doesn't necessarily amount to the opening salvos of a full-blown war, says Mark Chandler, global head of currency strategy at Brown Brothers, Harriman in New York. "Economic warfare may be a little strong, but economics and politics are at an intersection here more than at any other time," he says. While a number of countries are competing in the currency markets in their national interests, "I don't think there is a beggar-thy-neighbor policy for exports," he adds.

After all, the Japanese are trying to stem the rise of the yen, not cause it to fall, says Chandler, who notes that the currency has climbed 25% against the dollar in the last two years. Chandler cites market rumors that Malaysia and Thailand, also big exporters, are intervening in the currency markets to slow the upward drift in their currencies. The Malaysian ringgit is the fastest growing Asian currency this year, up 10.66%, while the Thai baht has risen 8.73%.

One of the main causes of the rise of Asian currencies is that investors have been fleeing the U.S. stock market and heading for emerging markets like Taiwan, South Korea and India.

U.S. Turns Up the Heat on China

President Obama last week urged China to do more to allow the yuan to rise. The Chinese currency is up only 2.06% since Beijing pledged in June to allow it to float slowly upward. U.S. economists believe the yuan is undervalued by about 40%.

The U.S. is "disappointed that there had not been much movement" since China's promise, says Jeff Bader, Obama's Asia adviser. "This had consequences for the global economy and for the U.S. economy, and we look to see more rapid and a significant revaluation in the months to come."

On Sept. 24, the House Ways and Means Committee approved a bill that would allow China's currency advantage to be used in calculating a so-called "countervailing" duty on Chinese imports. The bill goes to the full Senate floor on Sept. 29.

Currency Devaluation Can Be Risky

Under a headline of "Patriot games and currency wars," a Financial Times editorial Friday said Chinese exporters benefit from " a huge state subsidy" in the form of Beijing's intervention in the currency markets. But it added that hitting China with retaliatory measures wouldn't be effective. As historians like to point out, the introduction of tariffs in the 1930s helped cause the worldwide Great Depression.

Indeed, currency intervention can be tricky, Kelly says. Switzerland intervened heavily in the market last year to bring down the value of the Swiss franc and lost about $7 billion in the process, he says. In spite of the effort, the franc continued to rise against the euro. And in 1992, the U.K. spent billions of pounds in an unsuccessful attempt to boost the value of its currency.

The impact of currency value on trade flows is also hotly debated. As Chandler points out, the Chinese allowed their currency to appreciate 25% against the dollar between 2005 and 2008, and still their trade surplus was even bigger at the end than at the beginning. The cheap labor, more than the price of currency, kept Chinese exports attractive.

Says Chandler: "Boosting exports and having a weaker currency are not the same thing."

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monseigneurdev

It's been said "the bigger they are the harder they fall." Almighty Dollar!

October 04 2010 at 11:43 PM Report abuse rate up rate down Reply
sfamilyent

Boosting exports is good, but boosting domestic production and reducing imports is better. Other countries have restricted imports and are otherwise subsidizing their domestic production, to tilt the playing field in their favor. We need to step up our efforts to open their markets and/or provide incentives for businesses to locate facilities within our borders and disincentives for them to operate off shore. Currency value manipulation is one tactic being used to attempt to rig the international economic game.

September 28 2010 at 9:41 AM Report abuse rate up rate down Reply
Cherie

This is what happens when you take Silver Certificates we had them from 1878-1964. Replace it with IOU'S it. The media is spinning so much it dizzy. One day economy is hopeful, next day it is insert (name here,companies wall street ect. fault.) Another day it is yet another bill that will save us from government spending with more government spending. Today it is that nasty global economy. But wait there is more you can invest in gold. Or stand on your head with your big toe pointing north for all the good it will do you. There is no global currency war. Free market has been held hostage for years globally(with poor trade agreements meant to bring other countries up as we spread the wealth globally of course it is our wealth) and this is the end result. Is it November yet?

September 28 2010 at 7:38 AM Report abuse rate up rate down Reply
wildbill

PRESIDENT OBAMA SHOULD LEAN ON CHINA AND PUT A 10 % VAT TAX ON ALL IMPORTS IF THEY DONT ALLOW THEIR MONEY TO INFLATE TO WHAT ITS WORTH

September 28 2010 at 6:58 AM Report abuse +2 rate up rate down Reply
Iselin007

Show me the American jobs not the contracts with visa workers !

September 28 2010 at 6:34 AM Report abuse rate up rate down Reply
Iselin007

Now the goverment hastely tries to pump the economy to back up their claim that the recession ended while trying to hide the fect we are and have been in a Great Depression.

September 28 2010 at 6:32 AM Report abuse +1 rate up rate down Reply
Iselin007

No jobs and all Unemployment Extentions end in November. Elections and Christmas sales face a major adjustment to reality with no housing boom to pump it up. Care to guess the outcome? New Years is next ready to forgive all ect? I think not for Damn sure!

September 28 2010 at 6:29 AM Report abuse +1 rate up rate down Reply
toosmart4u

In my area there is a drive to "shop locally". I say lets get more American made products on your shelves to get me to shop locally.

September 28 2010 at 6:20 AM Report abuse +3 rate up rate down Reply
Robert & Lisa

Let the other governments try to manipulate their currencies. It will backfire on them. Free markets will win in the long run.

September 28 2010 at 6:17 AM Report abuse +2 rate up rate down Reply
mikfete58

Great Depression 2 underway...accelerating daily! Gold will make it to $3,000.00 an ounce by June of 2011 and silver to $100.00 ounce by the same time.

September 28 2010 at 5:55 AM Report abuse +1 rate up rate down Reply
2 replies to mikfete58's comment
Robert & Lisa

Maybe, maybe not. I wouldn't set a date.

September 28 2010 at 6:19 AM Report abuse rate up rate down Reply
Cherie

You do not have to set a date. A Depression is a Recession that lasts two years with weak GNP and High Unemployment.

September 28 2010 at 7:53 AM Report abuse +1 rate up rate down Reply