The recent round of central bank interest rate cuts and, in some cases, asset purchases have impacted sharply on the value of currencies, pushing some down and a few- notably the US$ – up. In the wake of this the US Congress, supported by the Chair of the Federal Reserve,[1] resurrected one of its long-term international bogeyman, ‘the Currency Manipulator’ (Weisman 2015). Those countries that deliberately depress the value of their currencies in order to make exports more competitive, especially compared to those of the USA, should be publicly branded as ‘manipulators’ and subjected to some form of compensatory trade action, such as countervailing tariffs or unspecified sanctions. A particular demand that has surfaced in the present upsurge of concern over manipulation is that prohibitions should be built into trade agreements, particularly the TPP and TTIP (Weisman 2015). Such demands ignore the extreme difficulty, in almost all cases, of demonstrating that a country is manipulating its currency and what would be accepted as enforceable rules and, not least, major doubts over the economic and geopolitical wisdom of imposing sanctions (Beattle 2015). While these considerations have hitherto inhibited any direct retaliation on the part of the USA, since 1988 the US Treasury has been required to evaluate the international economic and exchange rate policies of the major trading partners of the United States, in order to establish ‘whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.’ (US Department of Treasury 2014). This has seen some 22 countries being cited, with particular attention directed at Japan during the late-1980s and early-1990s and, most vociferously, China since c.2000. Other repeated suspects include Denmark, Hong Kong, Malaysia, South Korea, Singapore, Switzerland and Taiwan (Bergsten and Gagnon 2012: 1-3).[2] The USA also, during the early 2000s, attempted (unsuccessfully) to persuade the IMF to take action against manipulators, utilising the Fund’s Article One, which states that members should ‘avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members’(Beattle 2015; IMF n.d.).

While the earlier upsurges of concern by the USA over manipulation involved countries that were believed to directly intervene in the currency markets to depress the value of their currencies, the present situation is more complex. On the one hand are the rate cuts by Switzerland and Denmark, which were both stated, and largely seen, as motivated by concerns over currency appreciations against the Euro, sparked by the confirmation (on 22 January 2015) that the ECB (European Central Bank) would shortly begin a major QE (Quantitative Easing) programme. On the other hand, for most other countries the initial (stated) motive for rate cuts has been domestic issues related to growth and deflation, as with the Swedish rate cuts and bond purchasing programme (and the Asian economies noted below). However, the impact on currency values has undoubtedly been very welcome for almost all the countries concerned, and cannot have entirely absent from the minds of policy makers, and both their competitors and many commentators may be excused when they see the devaluation as, at the very least, part of the original aim of the monetary moves. Such situations, as Alan Beattle (2012) has noted, reflects a blurring of the distinction between intervention in the currency markets and domestic monetary policy. This is very clearly the case with Japan, where the massive QE programme (US$1.4tri. a year) initiated by the Bank of Japan from early 2013 has had little impact on Japanese growth or inflation, other than beyond rising asset prices But it has led to a much welcomed depreciation of the Yen against the US$ of some 40%. This is not only attracting the attention of the USA, but also of competitors in East Asia, with some predicting that Japanese policies could spark a regional currency war (Evans-Pritchard 2014).

Certainly there are signs that Asia is moving towards what could be seen as ‘competitive rate cutting’, with the moves by China, India, Indonesia, Singapore and Thailand expected to be followed by the Philippines, South Korea, and Taiwan. Cuts, which in India, Indonesia and Singapore have been accompanied by some degree and form of QE.[3] While all of these moves continue to be presented as responses to concerns over deflation and growth slowdowns, there have been significant resultant downward pressure on currency values. With the exception of China (see below), this has been welcomed, and all cases, at the very least, expected, if not an unspoken aim. It may well be that as the impacts on currency values work through, and begin to affect comparative levels of competiveness, this could become a much more central motivation for rate cuts and QE, particularly in an increasingly constrained set of export markets.[4] In addition, countries could also begin to move towards more direct interventions in currency markets. This is even more likely given the general shift to currency management regimes that have been a feature of East Asia since the 1997 financial crises and the prospects of rate cutting and QE proving ineffective in stimulating domestic economies (see below). However, in any significant escalation of the situation in these directions, the critical player will be China, whose currency has become a regional anchor.[5] At present, the Bank of China is implementing very gradual interest rate cuts while intervening to prevent the Renminbi falling in response to large-scale capital outflows, which are part of a broader outflow from Emergent Markets and into the USA in response to economic growth and expectations of interest rate rises. However, China is faced with domestic deflation, slowing economic growth, sharp falls in export earnings, even sharper declines in imports, a large trade surplus, as well as the need to support the currency. While Chinese Premier Li Keqiang has ruled out any devaluation of the currency (Barber et al 2015), China may not be able to sustain this position, particularly if the Yen continues to depreciate. In which case, the other Asian economies can be predicted to respond in order to maintain their competitive position.

Tensions in East Asia over currency values could well herald a much more general problem for the global system as whole. This can be expected to result from the impact of Asian devaluations on the region’s major trading partners, a general spreading of interest rate cutting and asset purchase in the face of slowing growth and fears of deflation and, the impact of the Eurozone QE programme (E1.1tri.). While this only started on 9 March 2015, it will undoubtedly intensify the currency problems of such economies as Denmark and Switzerland, and increasingly impact on the EU’s wider trading partners and competitors; thus, both widening and deepening the trend towards interest rate cuts, unconventional monetary measures and currency adjustments. Such an escalation is made even more likely, in the new situation where monetary policy coordination has receded. Currency markets have become more volatile, and there has been a remarkable revitalisation of the speculative currency markets that since 2008 were subdued (Cui 2015). The renewal of large-scale flows of funds into the currency markets raises the prospects of significantly greater volatility and the return of major speculative pressures on currencies. This is happening under conditions of general market nervousness, a gathering gloom over deflationary trends, persisting slow growth and competitive monetary policies which are taking country after country into the largely uncharted waters of near zero, zero and even negative interest rates (Barley 2015; Chilkoti 2015). Thus, we are perhaps seeing central banks reaching the limits of their ability to stimulate economies beyond the inflation of asset bubbles and currency depreciation. We can expect further pressure on currency values as they perhaps become the main transmission channel for monetary policy, as Brian Blackstone has argued (2015). QE designed to move stagnant economies and ward off recession through monetary means is now being revealed as changing the rules of multilateral trade back to the sort of ‘zero sum game’ of competitive devaluations and ‘beggar thy neighbour’ situation that haunted the 1930s, and led very directly to the establishment of the Bretton Woods fixed exchange rate system and the IMF stipulation noted above. The emerging situation also points to a general ineffectiveness of both that stipulation and the more pointed Article One of the Fund that states that countries should ‘avoid competitive exchange depreciation’ (IMF n.d.).

Against the above background the upsurge of manipulator rhetoric on the part of the USA, is not what is needed at this point, and has to be evaluated against American policy since 2007. For not only did the USA instigate a major wave of unconventional monetary policy, which while relatively successful as far as its own economy was concerned, did so with no regard for its impact on the value of its currency or general impact on the rest of the world, not least the emergent markets. Thus, the USA can be seen as both guilty of contravening IMF strictures against currency manipulation (see for example Daunton 2011) and the stricture against countries implementing policies that boost their own economy to the detriment of employment and income of another country (see Article One, IMF n. d.). However, the issue is not the apportioning blame for the consequences of policies, but rather understanding that these are responses to deep seated problems that are directly attributable to the Atlanticist triggered global financial crisis, and reveal the ineffectiveness of both the international financial architecture and its regulatory forms. On all counts the need is for a genuinely international response.


Notes

[1] See Federal Reserve Chair Janet Yellen testimony before the Senate Banking Committee on 24 January 2015, retrieved on 26 February from http://www.bloomberg.com/news/videos/2015-02-24/yellen-says-currency-manipulation-needs-to-be-addressed

[2] Essentially, any country that runs a significant trade surplus with the USA is likely to find itself on the Treasury list.

[3] While there has been much speculation over Chinese use of QE, there is no evidence that such a policy move is yet in chain and given that the current levels of interest rates and reserve requirement ratios are such that, unlike almost every other major economy, there still considerable room for further economic stimulus through conventional monetary measures (Back 2015; Davies 2015; Wildau 2015).

[4] A move that has perhaps been heralded by the Bank of Thailand, which made it clear that the 30-31 April 2015 rate cut and easing of capital controls were aimed specifically at depreciating the currency in what has been seen as a desperate attempt to jolt the flagging economy into life (Peel 2015).

[5] A number of major Asian currencies now track the Renminbi rather than the US$, including Indonesia, Malaysia, South Korea and Thailand.


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