Bank Indonesia is expected to keep its benchmark rate steady. (Antara Photo/Zabur Karuru)

Commentary: No, We're Not in a Currency War


MARCH 16, 2015

Anyone paying attention to the financial media could easily get the impression that the world is hellbent on stealing the US economic recovery. Central banks from Frankfurt to Beijing, the story goes, are pushing down their currencies' exchange rates against the dollar — and against one another — in a craven effort to make their exports cheaper.

Lest this "currency war" meme lead politicians to do anything inadvisable, let's be clear: It's a load of baloney.

True, there has been a lot of action lately in foreign-exchange markets. Even as the US Federal Reserve has moved toward raising interest rates, policy makers in other major economies  Europe, Japan and China  have been pushing rates down, sometimes into negative territory. This has led investors to seek better returns in dollars, causing the US currency's trade-weighted value to rise more than 14 percent over the past eight months and squeezing US exporters such as Caterpillar and Procter & Gamble.

Central banks' policies affect currencies, but this isn't necessarily warfare. Much depends on the motives. Unfair manipulation involves resisting upward market pressure on the currency, as China did throughout much of the early 2000s: The aim of the policy, you could say, is to keep the foreign-exchange market out of equilibrium. Easing monetary policy to stimulate a flagging economy is quite different  even if it gives exports a boost as a byproduct.

The euro area, Japan and China all have ample justification for monetary stimulus. If anything, the European Central Bank waited far too long to deploy quantitative easing to fight the region's economic malaise. Japan is struggling to emerge from its third recession in four years. China is trying to manage slowing growth and deflationary pressures.

There's even less reason to suspect trade-related motives in other emerging markets, where currencies have been plunging, too. Central banks in Russia, Brazil and elsewhere have actually been struggling to stem sharp declines in exchange rates, brought on by a combination of Western sanctions (in Russia's case), falling oil prices and investor concerns about companies' ability to pay their debts.

One way to check for unfair manipulation of exchange rates is to look at foreign reserves. Typically, manipulators buy foreign currency to keep their exchange rates artificially low, so their reserves grow. Since the dollar started rising in mid-2014, reserves in the euro area, Japan, China and most significant emerging markets have stayed flat or even declined.

Japan, China and the main emerging-market economies aren't engaged in currency warfare. Currencies are shifting because economies are diverging. And the bogus rhetoric of economic conflict is dangerous as well as wrong: If it leads governments to restrict trade, everybody will lose.

What's actually needed is closer cooperation on economic policy. That would lift some of the burden of adjustment from monetary policy and exchange rates, which have been asked to do too much. Governments repeatedly pledge to coordinate their policies more effectively  they trot this out at every Group of 20 summit  but never get around to it. That's a pity. But following through on the currency-war nonsense would be an even worse mistake.

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