The USA is about to join the so-called currency war. It is just a matter of time, some experts believe. One of them is Nouriel Roubini, the famous professor of economics from New York who predicted the latest global financial crisis.
In particular, he says that because of the current policies launched by Japan and the EU coupled with low oil prices the U.S. Dollar managed to gain a lot of strength against other currencies.
In a world of low domestic demand, most high-ranking politicians from many countries with emerging and developed economies had to stimulate economic growth and employment while being focused on their exports. In order to favor their exporters, they need weak national currencies along with conventional and unconventional money-and-credit policies.
The quantitative easing started by the ECB and the Bank of Japan triggered sharp upward pressure on the U.S. Dollar, pushing it higher against other majors. Evan such commodity currencies as the Australian and Canadian Dollars lost their value against their American counterpart. The same held true for emerging currencies. For all of them, the oil price collapse undermined the stability of their exchange rates. Still, this was beneficial for non-U.S. exporters, while American exporters suffered for a strong dollar.
The U.S. government has been seriously concerned about the overall strengthening of the national currency. Earlier this year, they used to hope that the domestic demand would remain strong enough to sustain the 3% annual GDP growth. They also used to think that lower oil prices when could with new jobs would stimulate the rise of household income and consumption while spending and investment would rise when backed by economic growth.
The situation now looks different. The government’s concerns regarding the USD exchange rate are obvious. The Dollar appreciated faster and stronger than expected, which affected inflation, net export and economic growth. As for the hope for bigger domestic demand, it has failed by now.
As a result, the USA had no other option but to join the international currency war in order to cap the dollar growth before it harms the national economy even harder. The Fed started talking about the national currency as a major factor affecting inflation, export and economic growth.
At the same time, the American authorities now seem to be less loyal to their counterparts from Germany and he rest of the Eurozone due to the quantitative easing, which is currently underway. The stick to oral interventions, which are likely to be followed by specific political measures. It seems that the Fed is going to delay the interest rate hike for a longer time than expected if the situation stays unchanged. If this is the case, this is going to reduce to nothing some of the recent gains made by the Dollar.
Eventually, the currency disagreement may lead a trade disagreement while the currency war may result in a trade war. This is not going to be beneficial for the USA, which is trying to create the so-called Trans-Pacific Partnership (TPP).
At the same time, the very doubt that Obama’s administration will be able to win the necessary amount of votes in the Congress to approve the TPP becomes stronger as there are bills promoting the idea of introducing customs duties for those countries manipulating their national currencies (participating in the currency war). If these are the necessary conditions for joining the TPP, Asian countries will definitely abstain from participating in it.
The world would be a better place if most governments around the globe stuck to the policies of supporting their domestic demand instead of focusing on exports by applying the make-it-at-the-expense-of your-neighbors rule. In such case, the countries would have to rely on tax-and-budget policies rather than money-and-credit policies. Even a policy leading to higher household incomes and higher spending would be a better solution for the domestic demand than national currency devaluation.
In this world, the sum of all the trade balances is equal to zero, which means that some countries cannot be net exporters. This means that currency wars are games leading to zero score. This is another reasons why the USA is doomed to join the currency war. It is just a matter of time.
