In conditions of weak domestic demand in many advanced economies and emerging markets, politicians are tempted to stimulate economic growth and employment by turning to exports. This requires a weaker currency – conventional and unconventional monetary policies that lead to the necessary devaluation.
Since the beginning of the year, more than 20 central banks around the world eased its monetary policy, following the example of the European Central Bank and the Bank of Japan. The countries of the periphery of the eurozone need a cheaper currency to reduce their external deficits and to accelerate their growth. But the weakness of the euro caused by quantitative easing, further rising current account surplus of Germany, which reached an impressive 8% of German gross domestic product last year. And without large imbalance between core and periphery in the currency union, the more deepens.
In Japan quantitative easing were the first “arrow” to “Abenomikata” – the reform agenda of Prime Minister Shinzo Abe. They sharply weakened the yen and led to rising trade surpluses.
The ECB and the Bank of Japan, however, led to a strong appreciation of the dollar. US money and strengthened its position against the currencies of major exporters of raw materials, such as Australia and Canada. For these countries, falling prices for oil and metals led to devaluation of local currencies, which supports economic growth and creating new jobs.
Rising dollar and against the currencies of emerging markets with deep economic and financial weaknesses, such as large financial deficits and current account, high inflation, slowing growth, significant external and internal debt or political instability.
Even China briefly let the yuan depreciate against the dollar last year. A slowdown in economic growth and manufacturing activity could tempt Beijing to allow the local currency to depreciate further.
Until recently, American politicians were not concerned about the strength of the dollar as the outlook for US economic growth were better than in Europe and Japan. Indeed, at the beginning of the year, there was hope that domestic demand will be sufficient to maintain the pace of the US economy economy by about 3% per year, despite the more expensive dollar. It was believed that lower fuel prices and the creation of new jobs will stimulate final consumption.
But things look different now, after data on economic growth in the US in the first quarter, which slowed sharply to just 0.2% if excluding stock is actually negative.
The dollar rose much faster than expected and suppressed net exports, inflation and the growth of the US economy. A strengthening domestic demand did not happen. Moreover, final consumption actually slowed in the first three months of the year.
As a result, the United States effectively joined the “currency wars” to prevent further appreciation of the dollar. The Fed began to speak openly about the dollar as a factor that influences net exports, inflation and growth. But politicians in Washington have become increasingly critical of Germany, the euro area and the cheap euro.
Moreover, verbal intervention will be followed by a political action because slower growth and low inflation caused by the strong dollar will delay raising interest rates the US central bank.
Currency wars could lead eventually to trade wars. This would bring trouble for the United States, amid attempts to conclude contracts for transatlantic and trans-Pacific partnership on trade and investment.
Uncertainty about whether the administration of President Barack Obama could muster enough votes in Congress to ratify these agreements already complicated by legislative proposals for sanctions against countries that engage in “currency manipulation.”
The global economy would grow more stable if most governments led policies that stimulate domestic demand. But that will require them to rely less on monetary measures and more appropriate fiscal stimulus and structural reforms. Even the policies of income that raise wages and hence consumption, are a better source of growth of currency depreciations.
The sum of all trade balance in the world is zero, which means that many countries may not be net exporters and these currency wars are ultimately a zero-sum. / Nouriel Roubini, The Project Syndicate /