Currency Wars in the Open?

Most wars use guns while trade wars are fought with tariffs. Currency wars are stealth battles. Normally, no country will admit to one. Why? Because no one wants a retaliation, especially if you are trying to export more by driving down exchange rates.

But the U.S. is different, President Trump brings out hostilities into the open by his misuse of Twitter. U.S. officials accuse China, Germany, Russia and Japan of gaining an advantage by keeping their currencies undervalued. Trump wants to move away from decades-long “strong dollar” policy. Weak dollar means “strong” America according to him (Trump). It may narrow trade deficit and improve earnings for U.S. companies in the short-term.

The most famous frenzy of competitive devaluations came during the Great Depression. Many abandoned the gold standard. Until 1971, the Bretton Woods system prevented the beggar-thy-neighbour strategies by linking value of currencies to the U.S. dollar. More currently, large countries allow market forces to determine exchange rates. So deliberate devaluation is rare.

So is Trump up the wrong tree? Yes, in the long-run, it is, productivity, innovation, inflation, growth rates, interest rates and a host of other variables (including speculation) that determine currency changes. In the short-term, however, Trump may win a battle or two but he will lose the war and hopefully his Presidency!

Reference:

1. How Currency Wars are Like Real Wars – for Wealth, Lucy Meakin  www.bloomberg.com

2. Albert Edwards: The US Is About To Take Global Currency War To A Whole New Level, Tyler Durder, ZeroHedge, 11 July 2019