Currency Conflicts On The International Scene

There has been discussion of ‘currency wars’ for a number of years. The
longest-running recent issue has been the persistent US current account
deficit and the matching surpluses elsewhere in the world, particularly
China. These ‘global imbalances’ surfaced before 2000, and look set to
continue for many years more, with little sign of the US deficit or Chinese
surplus closing, despite some movement in the real exchange rate. The issue
is wider than this. In 2011 Japan took steps to limit the rise of the yen.
There was concerted action by several central banks after the major
earthquake in north-east Japan on 11th March 2011, and late in October 2011
Japan took unilateral action to prevent the Yen from rising further. In
September 2011, the Swiss Central Bank imposed a ceiling on the value of
the Swiss franc and a number of emerging economies whose exchange rates
float freely, or relatively freely, and whose capital markets are fairly
open, have complained that their currencies have become overvalued because
international capital, looking for returns, has flowed into their
economies. Brazil has taken steps to limit the rise of the Real. Other
South American countries, including Chile and Peru, have been intervening
in the last year to prevent what they see as excessive appreciation. Global
imbalances and currency wars are the subject of frequent analysis by the
International Monetary Fund and they attract a great deal of attention in
the financial press. Currency conflicts cover two different phenomena: one
is disagreement about the level of a managed or pegged exchange rate, like
the Chinese Yuan; another is the inappropriate level to which floating
exchange rates are driven by market forces, as in the case of the Brazilian
Real, the Japanese Yen, and the Swiss Franc. A different analysis of how
exchange rates come about is required for each case. It reflects the fact
that the international monetary system comprises a variety of different
ways of determining exchange rates and carrying out monetary policy. Some
countries float, some peg, and others are in between. The current
international monetary system is not really a ‘system’ in the sense that
the Gold Standard or the Bretton Woods regime was a system. Instead, it is
an ad hoc, patchwork affair. This paper reviews the causes and consequences
of these currency conflicts, the way they are likely to develop in the
coming years, and some possible solutions.