Just because you don't trade or invest in the currency market, doesn't mean you shouldn't worry about the currency war now being waged around the globe. The strength of a nation's currency affects every citizen because it has an impact on jobs, wages, prices, inflation and just about everything financial.
Talk of a global currency war heated up again this week following news from Asia.
Singapore, in a surprise move,
tightened its monetary policy to contain inflation. The impact in foreign-exchange markets was immediate. The value of the U.S. dollar dropped against the Euro, the Pound, the Australian,
Singapore and Canadian dollars, and the Japanese Yen.
This came on the heels of news from China that it planned to hold down the value of its currency, the Yuan, by allowing its foreign exchange reserves to soar a record $2.65 trillion.
The move triggered a comment from Senate Finance Committee Chairman Max Baucus who happened to be visiting Beijing at the time. Baucus said the Senate was ready to follow the House of Representatives and pass legislation to correct what he called an "undervaluation" unless Beijing acted. He added that if China had allowed the Yuan to find its true value, the result would be the creation of up to 500,000 new American jobs.
Also commenting today on the China news, veteran financial newsman and consultant, Jim Paymar wrote on Facebook that "China's foreign-exchange reserves swell to $2.65 trillion, while paying slave wages and putting Americans out of work."
We could hear more on this tomorrow when the Treasury Department is expected to make its semi-annual ruling on whether China is deliberately manipulating its exchange rate. The U.S. hasn't formally branded China a currency manipulator since 1994 and a ruling against it isn't expected tomorrow. That's despite all the rhetoric about China stealing American jobs by keeping the Yuan artificially cheap.
Earlier this week, Treasury Secretary Timothy Geithner said in a television interview that the U.S. wants to make sure the yuan appreciates "at a gradual but still significant rate." A "substantially undervalued" yuan is unfair to other emerging economies that are letting their currencies move."
Also today, the United Nations Conference on Trade and Development (UNCTAD) said flows of foreign direct investment could be hit hard if there were an outbreak of currency wars or a series of attempts by leading nations to gain advantage by weakening their currencies. This statement came in a report that showed global flows of foreign direct investment had fallen for the first time in five quarters and was an indication that the global economic recovery remains fragile.
The subject of an international currency war was first voiced last month when Brazil's foreign minister, Guido Mantega, was quoted in the Financial Times as saying "We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness."
Simon Johnson is a former chief economist at the IMF, and a professor at MIT Sloan and a senior fellow at the Peterson Institute for International Economics. Writing for Financial Times, Johnson said "a great deal of responsibility for today's global economic dangers rests with America. First, most emerging markets feel their currencies pressed to appreciate by growing capital inflows. Investors in Brazil are being offered yields of 11 per cent, while similar credit risks in the U.S. are paying no more than 3 per cent. Moreover, U.S. rates are likely to stay low, because America's financial system blew itself up so completely (with help from European banks) and because low rates remain part of the post-crisis policy mix."
Johnson sees the "currency wars" as "merely a skirmish." He writes that "the big problem is that the core of the world's financial system has become unstable, and reckless risk-taking will once again lead to great collateral damage."
