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Excessive monetary easing and debt in the West may lead to currency ‘wars’
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As the US dollar is appreciating and beginning to reduce net exports, Democrats and Republicans are again talking about legislation to counter “currency manipulation.”
But the effort is poorly timed.
After the global crisis, capital inflows boosted China’s large balance-of-payment surplus while the People’s Bank of China bought US dollar-denominated assets in efforts to subdue upward pressures on the yuan. This period peaked in July 2014, when the foreign exchange reserves in China soared to US$4 trillion.
Today these directions are reversing. With net capital outflows, China’s balance-of-payment surplus turned negative in late 2014. The PBOC intervened but to slow depreciation. In China, easing does not signal a shift in the foreign exchange policy, but efforts to execute reforms, rebalance the economy, and internationalize the yuan.
In the first half of 2014, the US dollar rose from 6.05 to 6.25 yuan but strengthened to about 6.10 yuan in early fall. As the PBOC cut policy rates in November, the US dollar soared to 6.25 yuan. That’s about where it remains today, with higher volatility to be expected.
Asia did relatively well in 2014, with several regional currencies depreciating less than 5 percent against broad US strength, including the Thai baht, Philippine peso, Vietnamese dong, Korean won, Singapore and Taiwanese dollar. But times are changing.
Japan’s monetary expansion
At the start of 2014, the US dollar still amounted to 105 Japanese yen. While it did strengthen to almost 110 yen by October, the change came with the BOJ’s monetary expansion, Republicans’ recapture of Congress, and Prime Minister Abe’s delay in a sales tax hike. The US dollar soared to over 120 yen by mid-December — where it remains.
A strong correlation prevails between dollar/yen and dollar/won, which reflect competitive rivalries between Tokyo and Seoul. Between July and December, the US dollar soared from 1,010 to 1,120 Korean won. It remains around 1,110 won today. Even amidst sluggish demand in the West, Seoul seeks to preserve export competitiveness relative to Japan.
In Southeast Asia, Indonesia has attracted much attention. After the fuel price hike in November, the Bank of Indonesia also raised the policy rate. Despite fluctuations, the US dollar has steadily strengthened against Indonesia’s rupiah, rising from barely 9,400 rupiah to 13,080 rupiah today.
In the past few months, Malaysia has experienced intense weakening pressures. Since August 2014, the US dollar has soared from barely 3.15 ringgit to almost 3.70 ringgit today.
In Oceania, the Australian dollar has been struggling amidst the stronger US dollar and the plunge of commodities. Before last fall, the greenback was still A$1.06 but soared to A$1.30 by the year-end and remains close to that peak.
The forces that drive the erosion of the Australian dollar remain effective, including the perception of a stronger US dollar, deceleration of growth in China coupled with cautious easing, and the continued fall of commodity prices.
The new status quo is likely to prevail until the end of the 2010s, as exemplified by the interest rates in the advanced world. Before the crisis year of 2008, the US policy rate still exceeded 4 percent. Assuming the first hike will ensue by the fall and subsequent hikes will follow incrementally, that level will not be restored until 2018-2020.
In the absence of structural reforms, stagnation in America, Europe and Japan is being contained by unsustainable leverage, historically low policy rates, and excessive quantitative easing. The net effect is a decade-long currency war.
Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see www.differencegroup.net. Shanghai Daily condensed the article.
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