Who’s winning the currency wars?
Those who are worried about currency wars are too late — the wars are already here. China and the United States are both winning the race to cheapen their currencies for now. But if the rhetoric keeps heating up, everyone will be a loser.
American and Chinese officials traded blows over the weekend, setting the stage for a tense G20 summit next month. The head of China’s central bank rejected the idea of a big revaluation for the yuan, advocating a slow-acting “herbal medicine” instead. Treasury Secretary Tim Geithner took a swipe at countries with “significantly undervalued” currencies, of which China is an obvious example.
The United States claims to be a loser in the currency wars. But in reality it is winning. The dollar has fallen sharply against most of its trading partners’ currencies. On a trade-weighted basis, the dollar is the lowest it has been all year, according to the Federal Reserve major currencies index. The likelihood of an imminent bout of money-printing can keep that trend going for a long time.
China, meanwhile, claims not to be a winner. But that is disingenuous too. While the yuan just hit its highest level versus the dollar since officially abandoning its dollar peg in 2005, it has fallen heavily against most other currencies. The euro, the currency of China’s biggest trading partner, has strengthened 14 percent against the yuan. The Japanese yen is not far behind. Various emerging markets, such as Brazil, have also seen their currencies soar.
The gap between winners and losers is widening. With rates as low as can be in the West, money has poured into assets in the East and South. Many Asian stock markets are at multi-year highs — benchmark indices in Indonesia and the Philippines hit records last week. Emerging market bonds too are rallying, as investors scramble for yields. That adds further upward pressure to currencies already out of relative whack with their trading peers.
There is no easy answer. But that, unfortunately, is a fact of life when the world has been living in such an unbalanced way for years. A rate hike in the United States might squash economic growth and leave the world facing another dip. A rapid China revaluation could price the country’s exporters out of the market and lead to widespread unemployment.
A gradual but sustained revaluation of the yuan versus the dollar — combined with a halt to the dollar’s own depreciation — is the least bad way forward. But getting such a deal, as positions become increasingly entrenched, will be tricky. And if both sides refuse to do anything, a currency war could mutate into a trade war — a genuine lose-lose scenario.