The US Wants No ‘Currency War’ or… Sees No Benefit in It?

Market Leader informed

The issues of ‘currency wars’ are probably as topical today as the issue of the impending global crisis was a few years ago because if China is followed by a few other countries starting to actively devalue their currencies this will result in real trade wars. Unfortunately…
Obviously, the US, directly affected by this problem, doesn’t want them, either. For example, US Secretary of the Treasury, Timothy Geithner, indirectly referred to his eagerness to implement amicable currency policies. In particular, in his interview to The Wall Street Journal, a popular American publication, he pointed out that in his opinion, major global currencies – the dollar, euro and yen – are currently placed in identical circumstances, i.e. they are to a certain degree aligned with each other. Moreover, given this situation, Washington does not intend to take any action to devalue its own currency. However, many analysts tend to believe that in this way Timothy Geithner implies that the US is unlikely to weaken the dollar in the near future though this doesn’t mean that the country ‘has taken no measures’ to devalue its national currency, according to the Secretary. Indeed, Geithner’s words have been supported so far by that fact that the US dollar has gained ground in the global market, rising by a few levels. On the other hand, experts point out that the dollar's growth against the euro (as of today) has been affected primarily by speech the US Secretary of the Treasury following which investors rushed in a crowd to buy US dollars…
Apart from this statement, Timothy Geithner spoke for having all G20 nations approve general rules and standards of currency policies. (Note: the G20 Summit of representatives of finance ministries and central banks will be held during this weekend in South Korea). However, many US officials see no prerequisites for establishing such ‘general rules and standards’.
Interestingly, the US Secretary of the Treasury classifies all global currencies into three groups. The first one includes nations with currencies ‘undervalued by any measure’ – such as China, for example. However, according to Geithner, PRC has chances to bridge the ‘gap’ between the dollar and the yuan. What one needs to do is only maintain the newly established rate of growth of China’s national currency against the dollar. He believes that other developing countries will play a significant role in this question.
The second group suggested by the Secretary includes ‘developing economies that have flexile currencies, carry out interventions or introduce taxes to keep down the risk of significant appreciation of their currencies, market ‘bubbles’ and inflationary pressure’. The Treasury’s head said that the US treats such measures tolerantly.
And Geithner’s third currency group includes ‘roughly aligned major global currencies’.

Recently a number of countries, including South Korea, Brazil, Thailand and others, used currency interventions to prevent ‘appreciation’ of their national currencies. These steps were taken to stop export growth rates from a fall which, naturally, affected their economies negatively. In the context of recent events Brazil, Columbia, South Korea, Taiwan and Russia toughened cash-flow regulation to prevent currency fluctuations.
Notably, over the past few days the global community has been following behavior of global currencies more closely than ever. Interest is piqued by statements of famous players in the financial world. For example, IMF Managing Director, Dominique Strauss-Kan, stirred up the public by threatening ‘currency wars’ if countries decide to use currency exchange rates as an instrument for solution of their own problems. Guido Mantega, Brazil’s Ministry of Finance, has added fuel to the flames by making everyone ‘happy’ with his statement that currency wars have already broken out in the world when some nations artificially weakened their national currencies.
Note that ‘currency wars’ will be among top-priority issues during the expected G20 meeting. According to Dow Jones, a financial news agency, summit participants are recommended against ‘competitive devaluation’.

Another statement made by the US Secretary of the Treasury is also noteworthy in this context. He has admitted that he ‘will be pressurizing the G20 ministers to adopt resolutions and maintain a new economic balance’. In his opinion, this will help many economies to become less dependant on exports of their products to the US.
Coming back to the ‘roughly aligned’ global currencies – the dollar, euro and yen – the US Secretary of the Treasury contrasts them with the ‘unaligned’ Chinese yuan which is, by the way, regulated by the country’s government. However, experts have a different opinion: there is no ‘alignment’, in the direct sense of the word, between global currencies because the euro, in fact, appeared overvalued, and they believe the US regulates currency exchange rates at least as effectively as the developing nations.
The US official position on China, according to Geithner, is identical to that of some European countries – China has to be strengthening its national currency at a faster rate (by 20-40%). However, experts say that PRC ‘cannot afford this’ because, otherwise, many enterprises will be on the brink of bankruptcy and the overall unemployment rates will spike.

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