A Paradox – The War In Which The Weakest Wins

The War Of Money

China, Japan, Brazil, Switzerland, Taiwan and South Korea have all intervened to slow the appreciation of their national currencies and thus encourage their exports. More and more central banks enter the “currency war”. Economists warn that the effects of this move on the global economy are significant.

A weaker currency against other world currencies increases the competitiveness of a state on the export markets, all the while encouraging its population to only consume domestic goods. But when several states use the same method things could get worse, as Dominique Strauss-Kahn warns, the head of the International Monetary Fund. “This is not a global solution,” he said, quoted by Bloomberg.

Exports, protected at any cost

“We are in the middle of a war of the international exchange rates,” said Guido Mantega, the Finance Minister in Brazil. His statements come after several central banks have recently taken steps to depreciate their national currency, thus gaining from the export business, informs the Financial Times.

For the first time in six years, the Japanese central bank intervened to halt the advance of the yen, its national currency. In this sense, the institution has massively sold yens (worth about 20 billion dollars). Before taking this measure, the yen recorded against the dollar the highest level in 15 years, thus endangering the state’s economy, which is primarily based on exports.

In a similar action, Brazil’s central bank bought record amounts of dollars in the last two weeks, reaching values of up to one billion dollars a day. Recently, the Real, Brazil’s national currency, has recorded a series of appreciations in relation to other currencies, which placed it among the best performing currencies in the world. The depreciation felt by the dollar against the Real from the beginning of the year is 25%, according to Bloomberg.

Emerging states, inflow of investments

Taiwan and South Korea have also seen themselves in the need to step up in the evolution of the exchange rates of the New Taiwanese dollar, which rose recently due to the growing interest of investors in these emerging countries. Their investments in developing economies have resulted in increases in exchange rates.

In the context of registering a surplus in the current account, these initiatives have managed to raise some questions at Washington. China remains the country which took the most controversial decision, being accused by the United States of not allowing the Yuan to appreciate against other currencies. Economists believes that the Yuan is undervalued by more than 40%. In June, China’s central bank left its Yuan free, two years after this was steady (6.83 Yuan per dollar, representing the rate recorded before the crisis). However, the Yuan has appreciated by only 2% against the dollar, while the U.S. demands a growth of at least 20%.

Among developed countries, the most prompt intervention was that of Switzerland. Last year, the state began, for the first time since 2002, to take steps to stop the appreciation of the Swiss franc. Last week,  the franc reached a historic high against the dollar, namely 0.9824 francs per dollar. In Hungary, the parliament in Budapest passed a special law that protects people with mortgages in foreign currency (82% of Hungarian with loans in other currencies are denominated in Swiss francs).

Although they have promised since April 2009 “to refrain from competitive devaluations “, world’s leaders the G20 members will only submit an initial plan at the Seoul summit in November, according to The Wall Street Journal.

“We’re in the middle of a war of the international currency exchange rates,” said the Finance Minister in Brazil, Guido Mantega.11