The Global Economy in Turbulent Times

CHAPTER 73 Currency Wars at a Time of Deficient Demand¹

Brazil’s finance minister² said it all in the first week of October 2010: “We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.” The International Monetary Fund (IMF) has since warned that widespread currency interventions could derail the fragile recovery. Many nations are engaged in deliberate policies to weaken their currencies. Further competitive devaluation will inflame global tensions. At a time of continuing deficient demand, this is not the time for the world’s major currencies to face-off in what can only be described as an “ugly contest.” By the third quarter of 2010, attention had shifted from deep woes engaging the eurozone to reemerging economic and fiscal fissures in the United States. This sudden reorientation of focus helped the euro reverse most of its springtime collapse, and saw the US dollar lose more luster. Then, there is the ever-strong yen. Japan is faced with a deep economic malaise and anxious to ease the burden on exporters. It is not surprising the third quarter of 2010 highlighted the standoff over which of the three most actively traded currencies has the lousiest outlook.

The euro hit a new low against the US dollar (1.1917) on June 7, and for the first half of 2010, it was 15 percent from where it started in 2010. But the euro rose 11.5 percent in the third quarter of 2010. Against the yen, the ...