Sino-American currency war expected
Most observers of the financial scene are fully expecting a damaging currency war principally between the People's Republic of China and the United States, but extending to the euro and other global currencies.
The Wall Street Journal reports: "The U.S. and China deepened their confrontation over Beijing's foreign-exchange policies, prompting fears that the dispute could undermine economic relations between the world's two largest economies ... The increasingly hostile rhetoric suggests that leaders aren't moving closer to an agreement over how best to address the issue" (Damian Paletta and John Miller, "China, U.S. Step Up Fight Over Currency]," Oct. 7, 2010).
Reuters columnist James Saft put it this way: "China is so adroit in melding diplomacy, jawboning and action to keep the value of its currency low, that you have to feel something approaching compassion for the plodding adversaries from the United States, Europe and Japan" ("China's Skill Is Breeding Frustration," International Herald Tribune, Oct. 6, 2010, emphasis added throughout).
The recent fall of the dollar offers no encouragement in effectively marketing potentially lucrative exports. The Wall Street Journal reported that "the U.S. dollar touched record lows against several currencies [Oct. 7], adding to already high levels of strains between countries competing in the financial markets to keep their export markets competitive ... As [the] dollar weakens, talk of a 'currency war' is building" (Tom Lauricella, "As Dollar Falls, No Clear Path Toward Stability," Oct. 8, 2010).
The Financial Times also expressed its concerns: "If the world is on the brink of an out-and-out currency war, a variety of battalions has been out on manoeuvres in the past few weeks. The Bank of Japan ... has launched a fusillade of intervention to hold down [Japan's currency] the yen in foreign exchange markets ... The main combatants, the US and China, continued to exchange rhetorical salvos" (Alan Beattie, "Global Economy: Going Head to Head," Oct. 8, 2010). The same article noted that, according to the managing director of the International Monetary Fund (IMF), "There is clearly the idea beginning to circulate that currencies can be used as a policy weapon."
Recent diplomatic pressure by the European Union (EU) to persuade China to let the yuan rise to ease the situation has been met with strongly stated rebuffs voiced by Chinese Premier Wen Jiabao. Clearly Beijing has the monetary reserves to maintain a relatively weak currency.
Financial Times columnist John Authers sums up the potential risks: "First that a 'loser' in the currency war snaps and resorts to a trade war and second that currency traders get caught as they did in 2008 and lose a bundle. Those losses could cascade elsewhere in the [global] financial system" ("Everyone Will Lose in a Global Currency War," Oct. 10, 2010).
Such developments would compound the fragility of the financial infrastructure around the world, especially at a time when many nations are trying to climb out of the worldwide recession. (Sources: The Wall Street Journal, Financial Times [London].)
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