The currency war that matters

Foreign-exchange markets are becoming increasingly volatile as central banks fight to stimulate their economies. Japan’s commitment to open-ended money printing to weaken the yen has reignited fears of a ‘currency war’. The yen plummeted on Monday when a statement from a US Treasury official seemed to support Japan’s policy.

On Tuesday a joint communiqué from the G7 group of industrialised nations, which pledged to avoid a “race to the bottom” currency war, helped the yen fall further. But the drama didn’t stop there. An unidentified official from a G7 country later told journalists that the communiqué had been misinterpreted and actually signalled “concern about excess moves in the yen”. The yen promptly rallied, jumping 1.5% against the US dollar.

What the commentators said

The fact that the G7 felt the need to make a statement about currency manipulation is worrying, said Hamish McRae in The Independent. It reflects widespread fears that policymakers are playing with rates “to try to gain competitive advantage in a world that is short on demand”. It is clear that the memory of the 1930s Depression, when there was indeed a currency war, started by Britain in 1931 when sterling came off the Gold Standard, “lingers still”.

But once you dig beneath the emotive language, the hard evidence of a currency war is less convincing. For example, the European Central Bank’s promise to buy distressed sovereign debt from members has helped to reverse the capital flight from the eurozone and boosted the single currency. As for Britain and America, their loose monetary policy is primarily aimed at boosting domestic demand – holding down sterling and the dollar was just a “side effect”.

“Internal wrangling at the G7 is inevitable as developed countries fight over slivers of economic growth,” said James Mackintosh in the Financial Times. But these are mere skirmishes. “The real currency war is barely being fought, and is between the developed world and the big currency manipulators: China and the petrodollar bloc.”

Rather than exchange their oil or manufactured goods for products from the developed world, these manipulators prefer to lend back the dollars, yen, euro and pounds they receive. “The global imbalances in consumption and investment this creates is the currency war which really matters.”