[Viewpoint] Ending the ‘currency war’

The world economy is being dragged into a war zone involving currencies. It started with a bilateral skirmish between Washington and Beijing, with the deficit-ridden U.S. threatening to impose tariffs on China to make the Asian nation appreciate its currency’s value.

That rapidly evolved into a war on a global scale between advanced markets resorting to quantitative easing to buttress their sagging economies and emerging markets resorting to competitive devaluations and tough capital controls to offset hot money inflows, asset bubbles and currency volatility resulting from a cascade of foreign capital seeking greater returns.

On signs of the U.S. Federal Reserve readying $2 trillion worth of ammunition in the form of dollar-printing for another bout of monetary easing to jump-start the U.S. economy, Japan quickly reacted via a yen-selling intervention. The EU central bank was irked, fearing a sharp rise in the value of the euro.

As the greenback’s value went into a downward spiral, capital stampeded out of advanced markets and into emerging markets in pursuit of higher deposit and exchange rate returns. The massive rush wrecked havoc on their capital markets, prompting runaway currency appreciation and a plunge in debt yields, triggering strong defensive actions. Brazil and Thailand decided to tax foreign holdings of government bonds, and other emerging economies are mulling similar moves.

A sharp strengthening of a currency can dampen exports as well as lead to an economic slowdown and job losses. The competition to depress individual currency values is, in short, spurred by concerns about the economy and unemployment. Washington attacks Beijing for artificially capping the yuan’s rise and distorting the balance in global trade, while the latter accuses the former of disrupting global currencies by allowing excess liquidity to depress the dollar.

Japan sits on the fence, criticizing China for foot-dragging on the value of its currency while suspecting China of sparking the yen’s appreciation with heavy purchases of yen-denominated government bonds. Instead of pointing to the U.S.’s monetary maneuvers, Tokyo blamed Beijing and Seoul of manipulation to weaken their currencies. The EU is relying on monetary easing to sustain its economies, and it also finds fault with China’s surpluses.

In the background, emerging economies are complaining that they are being victimized by inflows of foreign capital.

Where is this brawl heading? The two who started the fight should cut through the knot.

In 1985, the Group of Five agreed on the Plaza Accord to settle a trade war by weakening the dollar against the Japanese yen and German mark.

But a similar pact will unlikely garner support from today’s Group of 20. Last week, the Financial Times and the Wall Street Journal carried opinion pieces stating different winners from the current currency war.

FT senior columnist Martin Wolf said that the “U.S. is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar.”

Yiping Huang, a professor of economics at Peking University, wrote an opinion piece for the Wall Street Journal saying that the “U.S. will lose the currency war,” as a move to seek a new Plaza Accord will be unlikely to win support at the G-20 in Seoul. He argued the U.S.’s unilateral actions will prove ineffective, as exchange rates don’t hold the key to fixing global imbalances. Instead, he called upon the world to focus on structural reforms.

Although media outlets are eager to write about an impending currency war, it isn’t likely that the U.S. and China will go into a head-on clash over the matter. It is old news that Washington wants Beijing to allow more flexibility in its currency policy and China has long been dragging its feet.

The bottom line is dissatisfaction in the pace of the yuan’s appreciation. Washington wants the pace to pick up while Beijing demands more patience until its local market matures. The Economist advises this solution to stop the currency war: “Keep calm, don’t expect quick fixes and don’t unleash a trade fight with China.” In other words, today’s foreign exchange dispute is nothing new, and the threats aren’t as menacing as they sound.

Instead of trying to draw up a grand fix like the Plaza Accord, the magazine advises G-20 members to take multilateral approaches behind the scenes to come to a mild but more lasting agreement on addressing global imbalances by implementing structural reforms to stimulate domestic consumption and allowing modest appreciation in the currencies of surplus-making countries.

If Korea plays a role in coordinating a similar agreement, the Seoul meeting could be credited with averting what could eventually have become an ugly war.

*The writer is an editorial writer of the JoongAng Ilbo.

By Kim Jong-soo