It's the silly season for currency interventions. Last week, Guido Mantega , finance minister of Brazil warned an 'international currency war' has broken out. As Brazil's central bank scrambled to buy close to $1 billion a day for almost two weeks - about 10 times its daily average - Mantega was only voicing what many governments have already expressed privately. That for all the calls for collective action and bonhomie displayed at various G20 meetings, when it comes to ground realities, it is each country for itself!
So, what's new about that? What is new is that unlike in the past when 'currency intervention' was always a developing country refuge, a third world stratagem that first world countries eschewed, this time round, first world countries are nothing loath to join the game.
Last month, Japan joined Switzerland in intervening in the foreign-exchange market. As the yen surged to a little short of 90 to the dollar, the strongest in 15 years, the central bank, fearing a strong yen, would jeopardise recovery, sold an estimated $20 billion yen. The last time it intervened to sell yen in the foreign-exchange market was in 2004, when the yen was around 109 per dollar.
It is not the only one. The Swiss central bank has been intervening to prevent the appreciation of the Swiss franc against the euro for close to six months now. The last time it intervened was in 2002. The Japanese and the Swiss are not alone. South Korea, host to the next G20 meet, has shown as much alacrity in intervening to keep the won weak; so have Taiwan and Singapore.
In the developing world, meanwhile, currency intervention has become much more frequent. China, an old hand at the game, has been joined by Brazil, the Philippines, India and Malaysia, to mention just a few. The danger is if intervention becomes the norm, rather than the exception, the resultant 'currency war' will not leave any winners. Worse, it will mean goodbye to any hopes of rebalancing the world economy.
Why is that important? Because as long as the global economy remains perilously unbalanced, the next crisis is not far away. Orderly currency realignment is, therefore, critical to rebalancing. But that calls for coordinated action by the major world economies (read G20) - not haphazard, beggar-myneighbour intervention of the kind that seems to be the fashion now.
The reason is simple. Cheap money policy in the US that causes the dollar to weaken against other currencies will help boost US exports and rein in the US current account deficit. Provided no country intervenes! So, left to itself, this realignment in currency values is a part of the remedy the world is seeking.
But this is where the catch lies! China, the world's largest exporter, continues to suppress the value of the renminbi. In the pre-crisis days, when economic growth was strong, most countries were prepared to look the other way and restrict their response to jaw-jaw. Not any longer! Today, as countries struggle to remain competitive in the global market, many seem to have decided to copy the Chinese. Hence the proliferation of currency interventions aimed at making currencies cheaper in order to boost exports.
So, what's new about that? What is new is that unlike in the past when 'currency intervention' was always a developing country refuge, a third world stratagem that first world countries eschewed, this time round, first world countries are nothing loath to join the game.
Last month, Japan joined Switzerland in intervening in the foreign-exchange market. As the yen surged to a little short of 90 to the dollar, the strongest in 15 years, the central bank, fearing a strong yen, would jeopardise recovery, sold an estimated $20 billion yen. The last time it intervened to sell yen in the foreign-exchange market was in 2004, when the yen was around 109 per dollar.
It is not the only one. The Swiss central bank has been intervening to prevent the appreciation of the Swiss franc against the euro for close to six months now. The last time it intervened was in 2002. The Japanese and the Swiss are not alone. South Korea, host to the next G20 meet, has shown as much alacrity in intervening to keep the won weak; so have Taiwan and Singapore.
In the developing world, meanwhile, currency intervention has become much more frequent. China, an old hand at the game, has been joined by Brazil, the Philippines, India and Malaysia, to mention just a few. The danger is if intervention becomes the norm, rather than the exception, the resultant 'currency war' will not leave any winners. Worse, it will mean goodbye to any hopes of rebalancing the world economy.
Why is that important? Because as long as the global economy remains perilously unbalanced, the next crisis is not far away. Orderly currency realignment is, therefore, critical to rebalancing. But that calls for coordinated action by the major world economies (read G20) - not haphazard, beggar-myneighbour intervention of the kind that seems to be the fashion now.
The reason is simple. Cheap money policy in the US that causes the dollar to weaken against other currencies will help boost US exports and rein in the US current account deficit. Provided no country intervenes! So, left to itself, this realignment in currency values is a part of the remedy the world is seeking.
But this is where the catch lies! China, the world's largest exporter, continues to suppress the value of the renminbi. In the pre-crisis days, when economic growth was strong, most countries were prepared to look the other way and restrict their response to jaw-jaw. Not any longer! Today, as countries struggle to remain competitive in the global market, many seem to have decided to copy the Chinese. Hence the proliferation of currency interventions aimed at making currencies cheaper in order to boost exports.
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