The “currency war” is raging with countries intervening in the forex markets, devaluing their currencies and pausing on necessary rate hikes. Europe seems unable to deal with China and the rest of the world. The Euro is on the rise and this will eventually hurt the European economies.
The big problem is China that maintains an artificially weak currency. China offers Europe so-called “support”, but this is a bear hug. Let’s see all fronts:
The interventionists
The Swiss National Bank is intervening to weaken the Swiss yen since March 2009. Their success is very limited – EUR/CHF and USD/CHF both fell since then, but no one will be surprised if they do it again.
Japan waited patiently, tried threatening an intervention and eventually made a move. After the effect of the intervention faded away, they lowered the interest rate to 0% and are willing to intervene again.
The currency printers
Since March 2009, the Federal Reserve has printed 1.75 trillion dollars in order to provide liquidity and boost lending. In 2009, this seemed to work, but the economy has stalled in recent months, and the Fed resumed the program. They’re now talking of expanding it big-time. The dollar is on the fall.
The Bank of England also had a wide asset purchase facility – 200 billion pounds printed. In recent months, inflation has risen in Britain, and one member already pledged for a rate hike. But now, the tables have turned and another round of pound printing is on the agenda, even hough inflation is still high.
The rate pausers
Australia, Canada and New Zealand are doing quite well, thanks to their commodities export and solid economies. All have hiked the rates, but now pause on more moves, partly due the currency wars.
The Chinese Problem
The main cause for the global imbalance is China – this huge country keeps its exchange rate too low, for a long time. This enabled it to enjoy rapid growth even in periods when the whole world was struggling. The low yuan made China the world’s No.2 economy, passing Germany and Japan on the way.
The US officially wants the Chinese to revalue the yuan but doesn’t do too much. Why? China is the biggest holder of US debt, and the Americans want to deal with the issue gently. In addition, there are enough American businesses that enjoys cheap Chinese imports to the US, and they also have a voice in Washington.
Anyway, as stated earlier, the Federal Reserve has its own tools of weakening the dollar against the rest of the world. And so do other countries – if they can’t fight China, they fight each other.
European weakness
But Europe cannot seems unable to fight, as it didn’t join past forex wars. European officials, such as ECB president Jean-Claude Trichet tried raising the issue with Chinese prime minister Wen at his visit to Europe. Finally. The answer was that China is supporting financial stability by buying European bonds.
Maybe that promotes stability in the financial markets, but this stability means a stronger Euro and no weaker yuan – a stable world in which China continues growing and Europe is not competitive. This is a bear’s hug.
Germany will be the main bearer of this bear hug. The German economy is dependent on exports and will be hurt by a stronger Euro. Germany is already carrying almost all the Euro-zone on its back, leading in growth and in job creation. All this is endangered now.
I wonder if the Europeans will start fighting back, or if Germany will make more concessions.
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