Currency Fluctuation and Manipulation

By Kindred Winecoff

Lots of talk of currency fluctuations lately. Sure, there's the U.S./ China spat over the RMB, but the controversies hardly end there:

Russia announced that the rouble, down 30 per cent since July, will be allowed to drop another 10 per cent against the dollar. Then it will try to bring the devaluation to an end.

The fall in sterling, which has halved in yen terms in the past 18 months, brought complaints from European politicians that the undervalued pound was an unfair advantage for the U.K. over the eurozone.

As for Japan, the 35 per cent fall in its exports last month was doubtless worsened by the 39 per cent rise in the yen against the dollar over the past 18 months, bringing it to a 14-year high. With western economies booming, Japan’s exporters could survive a strong yen. That is no longer the case. Asked on intervention, Japan’s finance ministry said it “should always be thinking about doing what may be necessary”.

What of China? The exchange rate of the renminbi to the dollar has barely budged since its appreciation halted last July. Amid market chaos, this was achieved only with careful management or, pejoratively, manipulation. But according to JPMorgan Chase, it has gained 12 per cent on a trade-weighted basis in the past year.

Nouriel Roubini was one of the only economists to predict an unraveling of the global financial infrastructure. But he predicted that it would occur because of a collapse in the value of the dollar; not because of over-leveraging and dodgy home loans.

Indeed, the U.S. could use a decline in the dollar to boost employment in exporting sectors and try to narrow the trade imbalance. But that hasn't happened. Instead, as the financial crisis has spread, smaller countries have flocked to the dollar (and euro) as a source of safety. Countries who rely on exports to boost growth -- like Russia and China -- have tried to keep the value of their currencies low to make their exports cheaper. Meanwhile, the pound is losing a lot of value, which is starting to really bother other European countries who feel that a cheap currency gives Britain an unfair competitive advantage in trade, and Japan has still not recovered from its zombie decade.

What does it all mean? It's possible that currency fluctuations will lead to beggar-thy-neighbor protectionist measures. It's also possible that the U.S. and Eurozone carry greater weight of unemployment and reduced GDP in the short- to medium-run by letting smaller countries ramp up their export-machines. It's also possible that domestic stimulus plans in the U.S. and Europe will simply be an employment subsidy to China and other less-developed export-heavy countries.

That might not be the worst thing in the world, except that it prolongs the needed structural adjustments. It might be better for countries to coordinate large fiscal stimulus, and impose some levels of capital controls (a Tobin Tax?) to slow down currency fluctuations and avoid a crisis. We should also expand the role and capabilities of the IMF, just in case it becomes necessary to bailout a fairly large country (e.g. Great Britain?).

What we should not do is start a cycle of devaluation competition or protection for domestic import-competing sectors of the economy. If that occurs, look for nations to call for bounded exchange rate pegs.

Comments

[Steven Hansen:]

"What we should not do is start a cycle of devaluation competition or protection for domestic import-competing sectors of the economy. If that occurs, look for nations to call for bounded exchange rate pegs."

you did suggest a tobin tax. there are many articles that warn of protectionism and barriers to trade. it seems like all the avenues to correct these imbalances have a reason why it should not be done.

i am really interested for somebody to explain how we are ever going to have balanced trade if we keep rejecting every mechanism to correct this problem.

Jan 25 03:48 AM

[blinded1:]

The Treasury Secretary nominee Tim Geithner said “ a strong dollar is to the interest of US…” while labeling China as currency manipulator because Beijing keeps the RMB’s exchange rate to dollar artificially low, or makes the Yuan weak and the dollar strong. I don’t get it. Does Geithner want to China to appreciate the Yuan therefore to weaken the dollar and undermine the America interest

Jan 25 01:45 PM

[OldLimey:]

blinded1: excellent comment - right on point. From my side of the Atlantic many of the actions President Obama has taken in his first five days are absolutely commendable. The choices he has made for his economic team, on the other hand, are deeply worrying.

Jan 25 02:11 PM

[User 344198:]

I think that we should heavily regulate financial derivatives and then the Tobin tax should be pursued. It will not solve all our problems with China though. Only paying off our debt to them will do that.

China holds so much of our debt that they could finish off our economy by cashing in U.S. bonds all in a short period of time. They have us by the testicles in this sense. I think this is more theater than anything. This is just talk to make Obama seem like he is doing something. The only way he can do something is pay down the debt and we all know he cannot do that.

Hurting China will hurt us. Fortunately, if they hurt us we won't buy their products anymore and that will hurt them too.
Obama will do very little. He only has military might to bargain with and I don't think he is that crazy....... or is he?

Jan 25 04:46 PM

[Kunst:]

They can't "cash in" the bonds they already hold. All they can do is sell them to someone else. They could refuse to buy more treasuries. Under normal circumstances, that would push interest rates up (and the value of their existing bonds down). But, the Fed has the nuclear option of just buying bonds (existing or new) itself, with newly created money. So how is China going to hurt the US?


On Jan 25 04:46 PM User 344198 wrote:

> China holds so much of our debt that they could finish off our economy by cashing in U.S. bonds all in a short period of time.

Jan 25 08:32 PM

[Morrison Bo...:]

China is correctly concerned about monetary stability, and its call for a new global reserve currency is excellent. Everyone who uses money is concerned about monetary stability, and currency fluctuations are no longer inevitable. However, instead of an SDR-based currency, which would be difficult to initiate and maintain and which would be incomprehensible to the people of the world, we should move to a Single Global Currency to be managed by a Global Central Bank within a Global Monetary Union. This next global currency will not be the responsibility of just one country. Such a global currency would be used by all the world's 6.6 billion people. What is needed now is international recognition of those goals, and research and planning to achieve them.
The success of the euro shows that monetary union is the best way to ensure monetary stability. The primary problem with the euro and currencies of other monetary unions is that they still must co-exist within the international multi-currency system itself where the value of those common currencies must still fluctuate in value against each other.
If 16 countries can use the same currency, why not 192?
In addition to eliminating currency risk, the use of a Single Global
Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totalling more than $3 trillion); and bring other benefits worth trillions.
The Single Global Currency Assn. (singleglobalcurrency.... promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference. That’s only 15 years away.
The world is moving toward a Single Global Currency through the creation and expansion and merger of regional monetary unions. Another route is through international monetary conferences proposals and agreements, such as were seen at Bretton Woods.
The challenge now is to reach that goal planfully, as soon as possible with as little cost and as few crises as possible.
See the book, "The Single Global Currency - Common Cents for the World."
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

Mar 25 01:08 PM