Global currency war
If a nation’s economy teeters on the brink of collapse, the value of its currency will inevitably fall. The U.S. dollar faces a devastating crisis due to the nation’s huge trade deficit, financial losses and zero-level interest rates. It plays a much smaller role than it used to in foreign currency reserves worldwide. The share of euro-denominated bonds in the international bond market has risen substantially, overwhelming dollar-denominated bonds.
Money naturally flows toward a safer currency. It is unreasonable to expect global funds to continue to be poorly distributed toward the U.S. dollar despite low interest rates and losses from foreign currency exchanges. If recent trends persist, a global currency war is inevitable.
French President Nicolas Sarkozy said, “The U.S. dollar can no longer claim to be the only currency in the world,” calling for a transition to a multilateral currency system that includes the euro. His comments came as the euro surged to a record high against the dollar.
China poses the biggest threat to the U.S. dollar. China has the world’s largest currency reserves, which are poised to top $2 trillion. The country has said it will not continue to buy more U.S. Treasuries in the future.
In addition, China has started the internationalization process of the yuan by allowing the currency to be used in deals with 10 Southeast Asian countries, as well as in Hong Kong and Macao.
Japan is also not sitting idly by. The idea of an Asian yen used to be Japan’s dream. However, it has not yet taken any official measures because of the U.S.-Japan alliance.
The global currency war may have an impact on Korea. The weak dollar may lead to the re-emergence of hyperinflation by stimulating raw materials prices. There is a need to diversify foreign reserves in order to stabilize the Korean won, in case the new key currency faces difficulty.
However, Korea can create new opportunities. It is undeniable that our success in concluding currency swap deals with the U.S., China and Japan was mainly due to strong nerve. The change of the key currency will cause a dramatic shift in the world economy. We need to pay more attention to forging closer ties with China and Japan for a rainy day. We need to accelerate the creation of the Asian Monetary Fund. However, the only way to survive in the age of the global financial turmoil is by further promoting the development of strong manufacturers and establish a sound financial system.