Bloomberg says, “maybe not.”
The report notes that it is usually not hard to
tell when a war has started when nation’s move soldiers, tanks, and
planes. “Currency wars are tougher to call, partly because there isn’t
even a clear definition of what they are.”
Bloomberg says that should be kept in mind when
evaluating President Trump’s accusations against central banks in Europe
and Asia. He tweeted June 18 that “Mario Draghi just announced more
stimulus could come, which immediately dropped the Euro against the
Dollar, making it unfairly easier for them to compete against the USA.
They have been getting away with this for years, along with China and
others.”
The President is right on two scores, Bloomberg
says. The euro really did decline against the dollar, to $1.12 from
$1.16 a year ago, after Draghi, the outgoing president of the European
Central Bank, said “additional stimulus will be required if the economic
outlook for the 19-country euro zone doesn’t improve.” Trump is also
correct that a cheaper currency would likely boost the region’s economy
by making exports from the euro zone cheaper abroad and by making
imports from the U.S. and elsewhere more expensive.
But Bloomberg disagrees with the president and
notes that “many economists also disagree with Trump that Draghi is
doing something wrong.”
It would be legitimate for the ECB to cut
interest rates, they argue, to stimulate domestic economic growth by
lowering borrowing costs for consumers and businesses. Of course,
cutting rates would likely reduce the value of the euro, which adds to
the stimulus, but that’s a side effect, not the goal. “We don’t target
the exchange rate,” Draghi said during a June 18 panel discussion in
Sintra, Portugal.
Let’s say the depreciation of the euro managed
to worsen the U.S. trade deficit enough to slow down the American
economy. The Federal Reserve could respond by cutting interest rates to
rev growth. That would incidentally lower the value of the dollar,
returning it to its previous exchange rate with the euro. But as in the
case of the euro, a weaker greenback would be a side effect of the lower
rates, not a primary goal.
It might look like a zero-sum stalemate when two
trading partners both cut interest rates, leaving the exchange rate
where it started. But it’s not. It’s an overall loosening of monetary
policy, which is good for growth in both countries, says Brad Setser, a
senior fellow at the Council on Foreign Relations. “In principle,” he
says, “that’s just a coordinated easing that increases the level of
demand.”
Trump’s argument that China is manipulating its
currency is even weaker than his case against Europe, Bloomberg says.
Far from pushing down the value of the yuan, the People’s Bank of China
has been countering market forces to slow its decline. China has kept
the benchmark one-year lending rate at 4.35%, where it’s been since
October 2015, in spite of economic softness that might seem to justify a
cut. Also, China’s holdings of foreign reserves haven’t risen
appreciably, as they would if China were trying to drive down the yuan
by selling it and buying other currencies. “The available evidence
suggests that China is trying to avoid a currency war,” Setser says.
Chinese leaders don’t want a weaker currency,
even if it gives a short-run economic boost, says Marc Chandler, chief
market strategist at Bannockburn Global Forex LLC in New York. The
country’s long-run objectives are “to move up the value-added chain” and
encourage the Chinese “to work smarter, not harder,” Chandler wrote in a
June 18 note to clients. Competing on price through a cheap yuan would
keep China stuck in its low-tech past.
How would anyone know if a country really were
playing unfair by depreciating its currency? One telltale sign is the
central bank buying lots of foreign currency to reduce its own
currency’s value, even though the country has a big surplus in trade and
investment income with the rest of the world. China was guilty of that
behavior up until early 2014. Singapore, South Korea, and Thailand have
also intervened at various times in recent years to suppress their
currencies’ value.
Today one of the chief currency offenders is
Taiwan, Setser wrote in a June 18 research note. The Taiwanese central
bank says it had $464 billion in foreign exchange at the end of May.
That’s more than the holdings of bigger nations
such as Brazil, Germany, and India. (According to a description on the
central bank’s website, the value of the Taiwan dollar is determined by
forces of supply and demand, though “when the market is disrupted by
seasonal or irregular factors, the Bank will step in.”)
So, even if the evidence is thin, U.S. officials
have often charged trading partners with “unfair” policies. In
addition, the administration’s reliance on escalating tariffs in its
“get tough” trade policy negotiations has increasingly come in for
criticism by groups on the front lines of such policies. These are high
stakes issues for ag producers and should be watched closely as the
trade war continues, Washington Insider believes.