In both September and October of 2012, I wrote articles examining whether the Federal Reserve was engaged in a global currency war or whether it was merely coordinated monetary stimulus. My conclusion was simple: we are not engaged in a currency war.
Immediately after those articles, we saw a brief lull in talk of a currency war, and a recent resurgence of the topic in the financial media. Some commentators have taken this resurgence to signify that the existing currency war is escalating, but I do not believe that to be the case. To claim that it is a war and that it is escalating is to suggest that central banks and governments around the world are actively attempting to devalue their currencies to undercut the labor costs of competitor nations. At present, the evidence suggests that central banks and governments around the world are simply trying to keep their domestic economies afloat; they are not seeking to harm other nations.
Those in search of evidence that we are not in a currency war need look no further than recent free trade talks. In particular, the U.S. government has announced in two major sets of free trade negotiations set to take place in the next couple months. The first is the Trans-Pacific Partnership, which will likely lower trade barriers between the U.S. and most of Asia. The second was announced in President Obama's State of the Union speech, a free trade compact with the 27 nations in the eurozone. These amicable trade talks are not the hallmarks of nations engaged in a currency war.
Skeptics seeking further evidence might also look to the official statements coming out of the G20 meeting. These statements indicate that floating exchange rates will continue, and no action is being taken by any country or group of countries to formally chastise currency manipulators.
The recent resurgence of currency war talk has largely been driven by the massive Japanese fiscal and monetary stimulus driving down the value of the yen. While this devaluing has been one of the main topics of discussion at the G7 meeting and the G20 meeting, a new entrant into the game of global economic stimulus does not suggest that this is a war, let alone an escalating war.
For those who are convinced that this is a currency war, one conclusion is certain -- the U.S. and Europe are both losing. Despite the decade-long downward trajectory of the dollar, in the last couple of years, it has begun to rise. Similarly, ECB officials have recently had to voice potential action to keep the value of the euro from rising too high.
Meanwhile, the prime candidates to be the next head of the Bank of Japan are all suggesting continued monetary easing and fiscal stimulus to buoy the stagnant Japanese economy as the yen continues to decline in value. To some, this might suggest that Japan is winning the supposed currency war, but the real winner from all this hype about the yen is actually China. For the first time in years, the G20 is talking about currency manipulation, and the focus of their attention is not undervalued Chinese currency.
Not A War
Although many countries throughout the world are engaging in stimulative fiscal and monetary actions that result in devalued currency, this is not a currency war. A currency war suggests coordinated attacks on other currencies and thus far, central bankers seem to have maintained myopic policies aimed at helping their domestic economies, not organized policies to aid the global economy. In his unequivocal statement that this is not a currency war, Atlanta Fed President Dennis Lockhart even alluded to the shortsighted domestic actions when he stated: "I don't believe we're in a currency war in any sense, but certainly there is a lot of attention of some countries to their exchange rate in terms of their competitiveness."
The bottom line is that whether or not you call it a currency war is largely a semantic issue. Japan is likely to continue devaluing currency, and China has never allowed their currency to rise to parity. Meanwhile, the U.S. has done everything in its power to devalue the dollar and decrease confidence in the future value of the dollar, but the currency remains relatively strong. Similarly, despite continued dysfunctional policy (or lack thereof) in Europe, the euro has climbed in recent months as well. So, investors should be careful to hedge their international portfolios against wild swings in currency markets because while this may not be a currency war, it seems to be something of a race to the bottom.