Foreign and Military Affairs

Who fires first shot of 'currency war'?

Updated: 2010-10-12 19:41
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BEIJING -- It takes much less than a CSI to find out who fired the first shot in the latest currency disputes.

In early September, news that the US Federal Reserve was leaving its door open for a second round of quantitative easing started to make headlines, spurring the building of short positions on the market.

This second phase of quantitative easing, dubbed QE2, has been widely viewed "an atomic bomb" given that the Fed's purchases of assets such as bonds will inject further huge liquidity into the US economy.

It should not bother any other countries much had the US dollar not been the dominant international reserve currency.

But given the "exorbitant privilege" the US has long enjoyed as a currency hegemony, it is no surprise that the move worries other countries with a prospect of them being flooded with cheap US dollars.

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The US dollar has been weakening since mid-September against other currencies such as the Singapore dollar, the Thai baht, the Malaysian ringgit and the Indonesian rupiah.

The Japanese yen also hit its highest in 15 years against the US dollar last Friday on New York market. Japan took to public intervening in the forex market for the first time since 2004. There are market speculations that the Thai government might intervene publicly.

The central bank of Brazil put in place a flurry of measures to limit the gains in its exchange rate. Even so, the Brazilian real was stronger Monday.

"We are in the midst of an international currency war ... Advanced countries are seeking to devalue their currencies," Brazil's Finance Minister Guido Mantega has said recently.

"'Currency war' might be too strong, but the fact the countries want to find domestic solutions to a global problem is really a threat to the recovery," said International Monetary Fund (IMF) chief Dominique Strauss-Kahn, who warned against using currency as a "policy weapon."

The measures, or rather, counter-measures, by the export-dependent emerging and developing economies were like knee-jerk reactions as they have been at the lower end of the global industrial chain. They did not initiate such moves to influence other economies or the global system, but were forced to act in their interests.

The United States, however, has been happy to see or even willing to act for a weak US dollar for its economic interests and, last but not the least, to cater to the need of the relentless domestic political cycle.

High unemployment, which has fed populist sentiments in the US recently, was partly explained by the deep entrenchment of the housing sectors, said Jeremy Warner, assistant editor of The Daily Telegraph.

These sectors have historically been a larger proportion of employment in the US than in Britain or other countries in Europe, and won't begin to recover until prices stabilize and unsold stock is cleared, he wrote in a column Monday.

"Beneath this sense of frustration at lack of progress -- and at international organizations such as the IMF and the G20 to bring it about -- there is an underlying truth that is often left unspoken; many of the problems in the world economy right now are not international at all, but US specific and can only really be solved by America itself," he said.

Retaliatory action against China and other countries is unlikely to help US employment much, Warner said.

Some in the US have been trying to find international solutions for an essentially domestic problem, showing no political appetite or will for the painstaking efforts needed to bring the deficit under control.

It is the view of many scholars including Nobel laureate in economics Joseph Stiglitz that the QE2 will not benefit the US economy, but will cause chaos in the international system and cost others dearly, in addition to creating long-term risks of high inflation for itself.

Warner also warned the US threatened to "bring us all down with it."

"The US has no strategy for the jobless and no strategy for rolling back debt. Little wonder that a renewed sense of gloom has settled on the international policy makers," he wrote.