The world is edging closer to all out currency conflict as Europe’s politicians join a chorus of policy-makers across the globe pushing for devaluations to fight for market share.
By
Ambrose Evans-Pritchard: Jean-Claude Juncker, EuroGroup chief, has signalled that Europe is no longer
willing to be the last economic player holding the toxic parcel of an
over-valued exchange rate, describing the euro as “dangerously high” after
its three-month surge against the dollar, yuan and yen.
The comments follow warnings by two French ministers this month that the
strong euro is holding back efforts to pull the France out of deep
industrial slump.
Alexei Ulyukayev, deputy head of Russia’s central bank, said the tilt in EMU
policy marks a new escalation as every major bloc of the global economy
tries to drive down its exchange rate at the same time. “We are now on the
threshold of very serious currency wars,” he said.
Korea has asked the G20 take a stand against beggar-thy-neighbour policies in
Moscow next month, accusing Japan and the West of covert debasement through
loose money.
Japan’s premier Shinzo Abe kicked off the latest skirmishes by threatening to
change the Bank of Japan’s statute unless it agrees to launch a monetary
blitz and weaken the yen. The euro has rocketed by 20pc against the yen
since July. “This will soon start to hurt core Euroland and Germany. The
Japanese compete in the same export niche of cars, machine tools and
electronics,” said Hans Redeker from Morgan Stanley.
He warned that European banks are still repatriating funds as they cut foreign
assets to meet tougher capital rules, pushing the euro higher. Global
central banks - especially in Asia - are also stepping back into the EMU
debt market after a buyers strike last year.
This is a double-edged effect. While they help cap bond yields, they are also capping their own currencies against the euro. Mr Redeker expects the euro to punch yet higher early this year before buckling and crashing to $1.08 by 2014.
Julian Callow from Barclays said the trade-weighted euro has risen 6pc since the third quarter of 2012. If sustained, this will lop around 0.4pc off eurozone GDP this year at a time when the economy is already contracting. The jobless rate has reached a record 11.8pc, rising to 26.6pc in Spain.
The ECB has so far refused to take action to curb euro strength, standing aloof as Japan, the US, Britain, Switzerland, Norway, New Zealand and Korea itself, among others, try to steer their currencies lower.
Austria’s ECB governor Ewald Nowotny said on Wednesday that euro strength is “not a matter of major concern”. The ECB’s president Mario Draghi brushed aside concerns last week, insisting that “both the real and the effective exchange rate of the euro are at their long-term average”.
The historical rate may mean little after years of intra-EMU divergence. A study by Morgan Stanley found that the “fair” rate for the euro is $1.53 for Germany, $1.23 for Holland, $1.19 for Italy and $1.06 for Greece.
The Lisbon Treaty gives EU finance ministers the crucial say over the exchange rate. The "Ecofin" council can fix the euro against other currencies by unanimous vote, and can shape a "dirty float" by a qualified majority vote. Any such ruling by the council would compel the ECB to shift policy.
Pressure for action is mounting as the slump deepens. A string of countries have downgraded their forecasts over recent days. Portugal’s central bank expects contraction of 1.9pc this year. The Netherlands said Dutch GDP will fall 0.5pc. Germany slashed its forecast from 1pc to 0.4pc.
As often in EU affairs, France is the pivotal state, with the heft to build a coalition. The country has been been losing global export share at an alarming since EMU began, shedding 100,000 industrial jobs a year. This has finally set off a protectionist backlash. Industry minister Arnaud Montebourg said last week that multilateral trade deals are “dead” and slammed predatory practices by China.
Adam Posen, a former UK rate-setter and now at Washinton’s Peterson Insititute, said there could be a chain-reaction this year as the dam breaks and each country resorts to "sauve qui peut" policies.
The underlying problem is a global saving glut as the world saving rate hits a record 24pc of GDP, chiefly driven by Asia and aging effects. Trade experts say the international system cannot return to healthy balance until excess capacity in global industry is whittled away.
This is a double-edged effect. While they help cap bond yields, they are also capping their own currencies against the euro. Mr Redeker expects the euro to punch yet higher early this year before buckling and crashing to $1.08 by 2014.
Julian Callow from Barclays said the trade-weighted euro has risen 6pc since the third quarter of 2012. If sustained, this will lop around 0.4pc off eurozone GDP this year at a time when the economy is already contracting. The jobless rate has reached a record 11.8pc, rising to 26.6pc in Spain.
The ECB has so far refused to take action to curb euro strength, standing aloof as Japan, the US, Britain, Switzerland, Norway, New Zealand and Korea itself, among others, try to steer their currencies lower.
Austria’s ECB governor Ewald Nowotny said on Wednesday that euro strength is “not a matter of major concern”. The ECB’s president Mario Draghi brushed aside concerns last week, insisting that “both the real and the effective exchange rate of the euro are at their long-term average”.
The historical rate may mean little after years of intra-EMU divergence. A study by Morgan Stanley found that the “fair” rate for the euro is $1.53 for Germany, $1.23 for Holland, $1.19 for Italy and $1.06 for Greece.
The Lisbon Treaty gives EU finance ministers the crucial say over the exchange rate. The "Ecofin" council can fix the euro against other currencies by unanimous vote, and can shape a "dirty float" by a qualified majority vote. Any such ruling by the council would compel the ECB to shift policy.
Pressure for action is mounting as the slump deepens. A string of countries have downgraded their forecasts over recent days. Portugal’s central bank expects contraction of 1.9pc this year. The Netherlands said Dutch GDP will fall 0.5pc. Germany slashed its forecast from 1pc to 0.4pc.
As often in EU affairs, France is the pivotal state, with the heft to build a coalition. The country has been been losing global export share at an alarming since EMU began, shedding 100,000 industrial jobs a year. This has finally set off a protectionist backlash. Industry minister Arnaud Montebourg said last week that multilateral trade deals are “dead” and slammed predatory practices by China.
Adam Posen, a former UK rate-setter and now at Washinton’s Peterson Insititute, said there could be a chain-reaction this year as the dam breaks and each country resorts to "sauve qui peut" policies.
The underlying problem is a global saving glut as the world saving rate hits a record 24pc of GDP, chiefly driven by Asia and aging effects. Trade experts say the international system cannot return to healthy balance until excess capacity in global industry is whittled away.
Source
Russia Says World Is Nearing Currency War as Europe Joins
By Simon Kennedy & Scott Rose: The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.
The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.
The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.
Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.
G-20 Clash
The skirmish may lead to a clash of G-20 finance ministers and central banks when they meet next month in Moscow, three months after reiterating their 2009 pledge to “refrain from competitive devaluation of currencies.”While emerging markets have repeatedly complained about strong currencies as a result of easy monetary policies in the west, the engagement of richer nations is adding a new dimension to what Brazilian Finance Minister Guido Mantega first dubbed a currency war in 2010.
After Switzerland blocked the franc’s appreciation against the euro since September 2011, Japan has reignited the latest round of rhetoric as newly elected Prime Minister Shinzo Abe campaigns to spur growth via a more aggressive central bank. The yen has slid 11 percent against the dollar since December and this week touched its lowest level in two years.
Now other policy makers are speaking out. Juncker, who leads the group of euro-area finance ministers, said yesterday that the euro’s 7 percent gain against the dollar in the past six months poses a fresh threat to the European economy just as it shows signs of escaping its three-year debt crisis.
‘No Concern’
While the euro fell, the power of his words may be limited by signals from the European Central Bank that it isn’t prepared to favor a weaker currency. ECB President Mario Draghi last week said he has no goal for the exchange rate, although he noted the euro was trading at its long-run average.The euro exchange rate is “not a major concern,” ECB council member Ewald Nowotny told reporters in Vienna today.
“For us, the exchange rate of the euro is one variable to be factored in, but isn’t a goal in itself,” ECB Executive Board member Peter Praet told La Libre Belgique newspaper in an interview published today.
Still, economists at Goldman Sachs Group Inc. and Citigroup Inc. (C) said in reports today that a further strengthening of the euro could eventually help trigger an interest-rate cut from the ECB.
‘Negative Impacts’
In Norway, Finance Minister Sigbjoern Johnsen said in an interview that a strong krone challenges the economy and that the government must ease pressure on the Norges Bank to avoid krone strengthening by conducting a “tight” fiscal policy. Norges Bank Deputy Governor Jan F. Qvigstad said yesterday that if the krone remains strong until policy makers meet in March, “that of course has an obvious effect on the interest rate.”That pushed the currency, which has emerged as a haven from the European crisis, to its lowest level in more than two months versus the euro.
Meantime, Riksbank Deputy Governor Lars E. O. Svensson said today that a strong Swedish krona would be “yet another reason” to lower borrowing costs. He last month argued for a deeper cut than the 0.25 percentage point move to 1 percent that colleagues supported.
“It’s obvious that the economy would manage better in this very difficult, weak economy with a lower rate and a weaker krona,” Svensson said in Stockholm.
Adverse Effects
Elsewhere, Bank of Korea Governor Kim Choong Soo said Jan. 14 that a steep drop in the yen could provoke an “active response to minimize any negative impacts on exports and investor confidence.” Vice Finance Minister Shin Je Yoon said today that South Korea wants the G-20 talks in Moscow to focus on adverse effects of monetary easing in the U.S., Europe and Japan.If Japan continues to pursue a softer currency, reciprocal devaluations would hurt the global economy, Russia’s Ulyukayev said today. That echoes recent concern from other international policy chiefs.
Federal Reserve Bank of St. Louis President James Bullard said Jan. 10 that he’s “a little disturbed” by Japan’s stance and the risk of “beggar-thy-neighbor” policies.
Reserve Bank of Australia Governor Glenn Stevens said Dec. 12 that there is a “degree of disquiet in the global policy- making community,” while Bank of England Governor Mervyn King said Dec. 10 that he worried “we’ll see the growth of actively managed exchange rates.”
Source
No comments:
Post a Comment