Currency War: A Dirty Little Secret Finds the Light of Day
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This weekend G20 officials are expected to declare a truce on the so-called 'currency war'. Not long ago openly talking about currency valuation was a huge taboo. In the west, the standard line by the U.S. and other governments was that surely a strong currency was in the national interest. If there was a currency war, you certainly didn't talk about it openly. Times, it seems, have changed... or have they?
While the U.S. is still hesitant to admit its monetary policy is aimed at weakening the dollar, Bernanke's intentions are very clear to those following developments. Recently Japan has been much less coy with their efforts to debase the yen.
Now, according to reports this morning, this weekend the Group of 20 industrial and developing nations will pledge to ensure that their monetary policy is focused on price stability and growth, rather than weakening their currencies. Based on the price action in commodities today, investors appear to be taking the pledge seriously.
ECB President Mario Draghi said on Friday talking about currency wars was "either inappropriate or fruitless, in all cases self-defeating." Draghi continued by saying that exchange rates are helpful but they are not useful from a policy perspective. Others would disagree.
Draghi's statement appears to harken back to the good ol' days when supposedly everyone wanted a strong currency and no one spoke openly about currency war. Target exchange rates was the dirty little secret central bankers were afraid to speak openly about. The lack of openness allowed China to peg its currency to the U.S. dollar, which many say started the currency war in the first place.
The fact that members of the G20 are in a way admitting that a currency war exists is a positive development from a communication standpoint. The fact that members of the G20 are talking about a truce instead of openly declaring war is less transparent, to say the least.
While the U.S. is still hesitant to admit its monetary policy is aimed at weakening the dollar, Bernanke's intentions are very clear to those following developments. Recently Japan has been much less coy with their efforts to debase the yen.
Now, according to reports this morning, this weekend the Group of 20 industrial and developing nations will pledge to ensure that their monetary policy is focused on price stability and growth, rather than weakening their currencies. Based on the price action in commodities today, investors appear to be taking the pledge seriously.
ECB President Mario Draghi said on Friday talking about currency wars was "either inappropriate or fruitless, in all cases self-defeating." Draghi continued by saying that exchange rates are helpful but they are not useful from a policy perspective. Others would disagree.
Draghi's statement appears to harken back to the good ol' days when supposedly everyone wanted a strong currency and no one spoke openly about currency war. Target exchange rates was the dirty little secret central bankers were afraid to speak openly about. The lack of openness allowed China to peg its currency to the U.S. dollar, which many say started the currency war in the first place.
The fact that members of the G20 are in a way admitting that a currency war exists is a positive development from a communication standpoint. The fact that members of the G20 are talking about a truce instead of openly declaring war is less transparent, to say the least.
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