By: Dan Weil
May 20, 2014
A year after G-20 finance ministers agreed to end their currency wars, competitive devaluations are back in style.
European Central Bank President Mario Draghi called the euro’s strength a “serious concern” last week, and officials in Australia, Canada and New Zealand have been making noise about weakening their currencies for weeks, the Financial Times reports.
China moved strongly to push down the yuan during the first quarter, spending an estimated $100 billion-plus in direct market intervention. Other emerging market governments are apparently fighting off currency strength too, including India, Brazil and South Korea, according to the Times.
The dollar’s weakness amid the Federal Reserve’s determination to keep short-term interest rates near record lows has put upward pressure on other currencies.
“It is inevitable that we will see a rise in tensions,” Eswar Prasad, a Cornell University economist, told the Times.
Central banks in developed nations are “trying to send a message as clearly as possible that they will design monetary policy to weaken the currency,” he said. At the same time, central banks in emerging markets are “very concerned about being caught in the crossfire.”
Governments seek to weaken their currencies because that boosts their countries’ exports by making them less expensive in foreign currencies. A weaker currency also can help stave off disinflation/deflation by raising import prices.
Anthony Mirhaydari, founder of Mirhaydari Capital Management, puts the situation in stark terms.
“We’re on the cusp of an outright currency war,” he wrote in an article for MarketWatch. It amounts to “a race to the bottom.”
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