(FT) – Everyone has been thinking it, but Guido Mantega, the Brazilian finance minister, has been one of the few policy*makers publicly to admit it. His assertion that there is a currency war going on follows a recent escalation of competitive intervention in the foreign exchange markets, with heavyweight powers armed with serious weaponry getting involved.
Although some argue that a generalised burst of foreign exchange intervention could act as a global monetary easing, a more widespread view is that such a round of competitive devaluation is more likely to inflame international *tensions.
It was a symbolic moment when Japan this month ended its six-year abstinence from intervening in the foreign exchange markets and sold an estimated $20bn of yen. Japan is the only one of the large industrialised Group of Seven economies regularly to have used currency intervention over the past 20 years. But its traditional rationale – that interest rates were so close to zero that conventional monetary policy was losing its strength – now applies to many more *countries.
Aside from China, whose intervention is one of the main causes of the global currency battle, several big economies have been intervening for some time. Switzerland started unilateral intervention against the Swiss franc last year for the first time since 2002 and did not sterilise it by buying back in the domestic money markets what it had sold across the foreign exchanges.
Japan’s yen ‘intervention,’ China’s yuan 'manipulation’
We’re in the midst of an international currency war, a general weakening of currency
–Guido Mantega, Brazil finance minister
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In common with several east Asian countries, South Korea, host of the Group of 20 summit, has been intervening intermittently to hold down the won during the course of this year. Deliberately weakening a currency while running a strong current account surplus has raised eyebrows in Washington.
Recently it was revealed that Brazil itself, which has been expressing concern since last year about inflows of hot money pushing up the real and unbalancing the economy, had given authority to its sovereign wealth fund to sell the real on its behalf.
The resort to unilateralism bodes ill for US hopes of assembling an international coalition of countries at the forthcoming G20 meeting to put pressure on China over its interventions to prevent the renminbi rising. While most of the countries currently intervening would be likely to welcome a revaluation of the renminbi, few emerging market governments seem to want to stand up to China publicly – barring sporadic criticism such as that from Brazilian and Indian central bankers earlier this year.
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Last week Celso Amorim, Brazil’s foreign minister, said that he did not want to become part of an organised campaign. Following a meeting of the Brics countries – Brazil, Russia, India and China – in New York, he told Reuters: “I believe that this idea of putting pressure on a country is not the right way for finding solutions.”
Mr Amorim added: “We have good co-ordination with China and we’ve been talking to them. We can’t forget that China is currently our main customer.” Brazil exports commodities to China.
Some, such as the Berkeley economist Barry Eichengreen, argue that attempts at competitive devaluation may not be a bad thing. If countries are essentially creating more of their own currency to sell, that in effect means they are loosening monetary policy. So a round of attempted devaluations, rather than being a zero-sum game, could end up as a form of semi-co*ordinated monetary easing.
But others warn that this rosy scenario ignores the confusion that may arise when every country is intervening against its own currency in the foreign exchange markets, conveying a spirit of competition rather than co-operation. Ted Truman, a former US Treasury and Federal Reserve official now at the Peterson Institute in Washington, says: “Mixing up intervention and monetary policy can be dangerous. Trying to calibrate the extent of intervention is going to be very hard when people don’t really know what they are doing.”
Mr Truman says that given the weak global recovery there may be a case for central banks to move towards quantitative easing, seeking to boost the money supply further. But he says it is far better for each country to do so in its own domestic money markets than by intervening in the currency markets.
For the moment, co-ordination seems further away than ever. And since every country cannot devalue at the same time, and given that some authorities – such as the Europeans and Americans – are generally less willing than others to intervene to suppress their currencies, more competitive devaluation could provoke sharp and destabilising movements in currencies.