World must let U.S. win currency war

August 16, 2011

By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Currency wars have returned, and this time the world has little choice but to let the United States win. The Fed’s vow to keep U.S. interest rates near zero until 2013 heralds a prolonged devaluation of the dollar. For export nations, the temptation is to fight back by pushing their own currencies lower. That’s a mistake. Tit-for-tat devaluations are futile, and would delay the recovery of exporters’ number one customer, turning a global slowdown into dreaded stagflation.

Cheap dollars threaten to revive the carry trade, where investors flock to high-yielding assets, such as the currencies of fast-growing countries. Where they go depends on how the U.S. economy responds. If recession is averted, investors will choose markets with growth like Indonesia. If not, they’ll favor those that seem safe, like Japan. Some currencies are both, such as South Korea, which despite high private-sector debt offers strong government finances and strong trade.

For exporting economies, this will be unpleasant. Hot money inflows hurt exporters by pushing up the currency and the price of their exports. Already this year the Japanese yen has strengthened 5.6 percent against the dollar, prompting an abortive attempt by the Bank of Japan to push it back down. The Swiss franc has soared 21 percent, leading to talk that the Swiss National Bank may peg it against the euro.

Suppressing a currency’s rise to protect exports, as China has been doing for years, is risky. It means creating more local currency and stoking inflation. Policymakers’ response is often to raise interest rates, but that only attracts more hot money, creating asset price bubbles. Moreover, the unwanted effects of a strong currency pale next to the damage another U.S. recession would cause. In trying to frustrate the Fed, exporters could find themselves even worse off.

There are some ways to mitigate the pain. Macroprudential measures can help to steer hot money away from bubbling sectors like property, and guide it into underfunded sectors such as green energy or social infrastructure. Moreover, by stopping their own printing presses and allowing the dollar to fall, exporters can speed the kind of rebalancing the U.S. and its trade partners have put off for too long. Painful as it seems, winning the battle for global growth means losing the currency war.


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No, Wayne.

The assertion that the US must be allowed to “win (the) currency war” completely undermines the global principles and practices of floating exchange rates, and fundamentally implies that the many export-oriented nations who have successfully and legitimately managed and expanded their economies now give an unfair trade advantage to the US for… (what legitimate reason?)

Proposing that many export-oriented nations inflict economic, fiscal, social and monetary damage to themselves to deliberately and artifically support a failing US economy (fiscal, monetary and regulatory policy included) is akin to proposing to these nations to give the US ‘financial aid’ (thereby damaging thier own economies).

I understand that the basic principle behind your ideal is to redistribute wealth from the many export-oriented nations to the single largest consumer economy to inject support and longevity into a US-led global economic recovery, however that ideal excludes one of the primary and fundamental reasons the world is in this situation – loose (bad) US fiscal, monetary and regulatory policy, implimentation and management over the previous decade or so.

So, what has the US done (implimented) to improve it’s loose (bad) US fiscal, monetary and regulatory policy, implimentation and management to ensure your ideal would work?

How would the US ‘repay’ the implimentation of this ideal to the many export-oriented nations who might agree to this? (It equates to a financial transaction, a loan, and has to be repaid.)

What should the US do in return for the many export-oriented nations if this ideal is accepted by these nations, and it works for the US?

How is it equitable that more than 2,000 million (2 billion) people experience some form/s of economic, fiscal, social and monetary damage to artifically support 250 million people.

These are just the ‘basic questions’ to be asked of your ideal and there are many more important and significant questions that would follow.

No, Wayne – allowing the US to “win (the) currency war” comes at to high a price for the rest of the world that is finding it hard to survive the current global issues.

The global redistribution of wealth has already begun, and the ideal to re-concentrate it to a fiscal, monetary and regulatory moribund US economy is to effectively ask the many export-oriented nations to give back much of what they have fairly, legitimately and honestly earned to the detriment of thier own people.

Your ideal throws good money after bad and makes 2,000 million people unnecessarily suffer moreso.

And, it just ‘kicks the can down the road’, again.

The US will have to do it’s own work to repair it’s own nation and economy, and I hope it succeeds.

Leave alone the many export-oriented nations that to continue to fill the consumer-gap that bad US fiscal, monetary and regulatory policy, implimentation and management has created.

Posted by rh_au | Report as abusive

Won’t the investors money leaving the US for other countries drive up interest rates here and cause inflation here as the government prints ever more money to depress the dollar?

Posted by zotdoc | Report as abusive

Our National debt represents approx. 25% of all the debt in the world and doesn’t include unfunded entitlements/liabilities of $50+ Trillion! They better let us win and we’ll change when we’re broke-it’s the progressive way!

Posted by DrJJJJ | Report as abusive

The swarming or “flash mobs” you see in the States will pale by comparison with what is coming next.
58% of Americans actually have jobs.
That number will decrease in the upcoming months.
The corporatists control America and Congress, which is why nothing is done about our debt, or our internal financial capital issues. Congress is too afraid of their corporate masters and let the people be damned.
They want to reform health care, the insurance company with paid off politicians balk, and say, let more Americans die or go into bankruptcy because they can’t pay their medical bills.
They try to increase taxes on corporations and cut loopholes, the paid for polticians paid off by the millions paid to Congress by GE, Exxon, and other top 100 corporations say no.
They try to fix banking regulations by reimplementing Glass Steagall, and their bank bosses say NO, so let the derivatives game continue.
FInally Congress tries to fix the deficit, and this time ignorant Tea Party politicians balk at anything constructive or balanced, firmly entrenched in their ideology and ready to send America off a cliff along with themselves so that Obama can “lose” the 2012 elections.
Now you have Buffet and GE saying its okay for them to be taxed. If it wasn’t so blatantly self serving it would be funny. While I like Buffet, I don’t like GE nor the banksters.
You will soon see riots in America. Hopefully they will be acts of civil disobedience and not anything more.

However with Bernake now running out of options, all we can do from here on out is to wait for hyperinflation to set in, or wait for a declaration of war from the Congress against Iran or Syria or military action in Libya if Gaddafi is not gone(to distract Americans), and hope the US does not get too crazy on the streets in the meantime.
As far as GE is concerned, the head of GE must be a historian, at least he is talking up a good game, self serving no doubt. The banksters have not gotten the memo as yet. Let’s put it this way: what happened to those who said “let them eat cake”? Soon the people will take to the streets in America. I hope that none in authority suffer the same fate as those French leaders, but alas, they say history repeats itself for a reason.

Posted by Independent007 | Report as abusive