The Daily Need

Currency war… averted?

President Barack Obama listens to South Korea's President Lee Myung-bak during a joint press conference at the presidential Blue House in Seoul Thursday, Nov. 11, 2010, on the sidelines of the G20 summit. Photo: AP/Yonhap News Agency

When President Obama arrived in Seoul for the G20 Summit earlier this week, the Federal Reserve’s recently announced round of quantitative easing (see here, here & here for better explanations than we’re capable of) had increased the chattering about the possibility of a global currency war.

The Council on Foreign Relations Sebastian Mallaby wrote last week, “quantitative easing will test the world’s commitment to an open international economy… the United States has lost its moral authority to broker currency peace.”

William R. Cline and John Williamson in a recent policy brief for the Peterson Institute for International Economics wrote that “a widespread currency war is in prospect.”

Many countries, including Brazil, China, India, Indonesia, Israel, Japan, Korea, Malaysia, the Philippines, Singapore, South Africa, Switzerland, Taiwan, and Thailand, are reported recently to have engaged in exchange market intervention and/or capital controls to curb currency appreciation. There are fears that currency appreciation may be worsened by the additional quantitative easing (the so-called QE2) in the United States.

Prior to arriving in South Korea, President Obama defended the Fed in a press conference from India. “I will say that the Fed’s mandate, my mandate, is to grow our economy.  And that’s not just good for the United States, that’s good for the world as a whole.” He added, “the bottom line is that every country that participates in the G20 will benefit if the United States’ economy is growing.”

Needless to say, not everyone is as rosy on the Fed’s actions. In the Financial Times, the Brazilian Finance Minister Guido Mantega said, “Everybody wants the U.S. economy to recover, but it does no good at all to just throw dollars from a helicopter.”

Well, two days later the G20 Summit has come to an end and according to South Korean President Lee Myung-bak the world has gotten at least a temporary reprieve on an all out currency warfare. Following the Summit Lee said, “For now, in conclusion, (the world) is out of the so-called currency war.”

Technically, the declaration stated the twenty leading economies commitment to:

Undertake macroeconomic policies, including fiscal consolidation where necessary, to ensure ongoing recovery and sustainable growth and enhance the stability of financial markets, in particular moving toward more market determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals, and refraining from competitive devaluation of currencies.

The final communiqué did not include any hard limits, but rather consensus on “refraining” from messing with exchange rates. The G20 has put off the hard decisions until next year.

But to President Obama, any agreement – even a weakened agreement – is occasion to celebrate. “Instead of hitting home runs, sometimes we’re going to hit singles.”

 
SUGGESTED STORIES

Comments

  • Anonymous

    When you allow currency trading to people like me who have no fundamental basic need to do so other than making money from a few pips movement in a currency versus another, no additional wealth was created perse as for each winner there is a loser.. The only benefit is in the variable tax regimes in various countries where capital gains taxes are low like the USA.
    We need to go back to fundamentals of currency trading pays for goods and services, and not used by hedge funds to make money ( or lose it) with no commercial reason to be involved, just betting on a currencies strength or weakness often based on silly rumours, or dire debt crises that never fully materialise.
    China would be crucified if it kept its exchange rate too low = exports cheap yes, but imports costly, and it needs Oil, basic minerals coal and many other basics, the only solution to which if currency trading is on real goods and services would force the revaluation needed to keep trade balances fair.
    Then the WTO would be a major viable attack source if China was managing this with Import taxes or export reliefs.
    The problem, American business interests make huge profits out of China and a managed YUAN or Renmimbi helps them do it.
    Its simple if they will not re-value the currency then Coal, OIL, Iron Ore prices and other basics need to increased by 10 -15%., and let that feed thru to export prices on goods and services only.
    This supply demand economics on pricing to various markets. Means stop pricing contracts to China in $ or Euro but by Yuan and or Renmimbi
    Regards,
    Guest 5.

  • Anonymous

    When you allow currency trading to people like me who have no fundamental basic need to do so other than making money from a few pips movement in a currency versus another, no additional wealth was created perse as for each winner there is a loser.. The only benefit is in the variable tax regimes in various countries where capital gains taxes are low like the USA.
    We need to go back to fundamentals of currency trading pays for goods and services, and not used by hedge funds to make money ( or lose it) with no commercial reason to be involved, just betting on a currencies strength or weakness often based on silly rumours, or dire debt crises that never fully materialise.
    China would be crucified if it kept its exchange rate too low = exports cheap yes, but imports costly, and it needs Oil, basic minerals coal and many other basics, the only solution to which if currency trading is on real goods and services would force the revaluation needed to keep trade balances fair.
    Then the WTO would be a major viable attack source if China was managing this with Import taxes or export reliefs.
    The problem, American business interests make huge profits out of China and a managed YUAN or Renmimbi helps them do it.
    Its simple if they will not re-value the currency then Coal, OIL, Iron Ore prices and other basics need to increased by 10 -15%., and let that feed thru to export prices on goods and services only.
    This supply demand economics on pricing to various markets. Means stop pricing contracts to China in $ or Euro but by Yuan and or Renmimbi
    Regards,
    Guest 5.