MOSCOW(MNI)
The Chinese currency is likely to be a relative sideshow in Moscow compared to disconcerting movements among the dollar, the yen and the euro.
What is different about foreign exchange tensions of late is that they have less to do with outright currency intervention, at least among the major currencies, than with a slightly more subtle means of exchange rate management
-- namely the use of stimulative monetary policy.
Another difference is that, whereas in the past it was usually the U.S. charging its trading partners with unfair exchange rate practices, now it is the U.S. itself which is often the target of such complaints.
The Fed's policies came under vigorous assault from emerging market nations at the IMF meeting in Tokyo last October. Most notably, Brazilian Finance Minister Guido Mantega, who first used the term "currency war" in late 2010, and whose G20 country has engaged in foreign exchange intervention to resist upward pressure on its currency, clearly had the U.S. in mind when he alleged that the main aim of "quantitative easing" in "advanced nations" is to boost growth by depreciating their currencies.
"If the domestic transmission mechanisms are weak, monetary policy will operate mainly through its effects on exchange rate depreciation and the resulting increase in net exports," Mantega said, adding that "advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies."
"'Currency wars' will only compound the world's economic difficulties," he said. "Trying to grasp larger shares of global demand through artificial means has many side effects. It is a selfish policy that weakens the efforts for concerted action."
Mantega served notice that Brazil and other emerging market countries "cannot passively endure the spillovers of advanced countries' policies through large and volatile capital flows and currency movements." He vowed to "take whatever measures it deems necessary to avoid the detrimental effects of these spillovers."
Bernanke, whose Fed had just announced $85 billion in bond purchases the prior month, defended Fed policy in Tokyo and countered that emerging market nations' own rigid exchange rate policies are the source of their problems.
Bernanke said he was "sympathetic to the challenges faced by many economies in a world of volatile international capital flows." And he acknowledged that "highly accommodative monetary policies in the United States, as well as in other advanced economies, shift interest rate differentials in favor of emerging markets and thus probably contribute to private capital flows to these markets."
However, Bernanke said "it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies." He said the effects of capital inflows, whatever their cause, on emerging market economies are not predetermined, but instead depend greatly on the choices made by policymakers in those economies.
"In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth," he continued. "However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation."
But the Fed's policies are affecting the value of the dollar against all currencies, not just those of emerging market countries. And it is no accident.
Although Fed policymakers do not usually talk about it, one of the Fed's objectives in expanding bank reserves and extending the period of near-zero short-term interest rates -- along with lowering market rates and increasing asset prices -- has been to spur growth through the exchange rate channel.
Richmond Federal Reserve Bank President Jeffrey Lacker was quite explicit about this in an interview last October.
"I think the FOMC's policy initiative in September was designed in part to depreciate the dollar, and I don't think there's any question about that," he told MNI.
Bank of Mexico Governor Agustin Carstens didn't directly refer to his central bank neighbor north of the border Wednesday, but might have had the Fed in mind. "I would not say that we are not in a currency war, but it has to be recognized that in some countries they have used certain policies to induce movements of their currency aimed at making themselves more competitive, movements that we, in general terms, do not share."
Carstens suggested such policies are foolhardy. "If we in fact entered a true currency war, what would end up happening in reality is a lot of volatility in the financial markets and a jump in the balance of risks, and at the end of the day, no one would end up winning. It would be a process resulting in net costs to all of the countries and no net benefits."
The Fed is not the only central bank which is resorting to quantitative easing, of course. The ECB, the Bank of Japan, the Bank of England, even the once staid, hard money Swiss National Bank are also indulging.
The BOJ, which originated quantitative easing years before the Fed adopted it to battle an intractable deflation problem, is in the process of stepping up its bond buying considerably under pressure from new Prime Minister Shinzo Abe. And the Japanese have made no bones about the objective: to weaken the yen.
The yen, which appreciated to a high of 76.2 yen to the U.S. dollar Feb. 1, 2012 and spent much of the year below 80 yen, became a political issue in Japanese elections. Abe made clear in December before taking office that he intended to push the BOJ for a weaker yen.
"Countries around the world are printing more money to boost their export competitiveness," he said. "Japan must do so too ... . It makes a big difference whether the yen is at 80 to the dollar or at 90 to the dollar."
The BOJ's more aggressive quantitative easing, together with such rhetorical flourishes, have accomplished Abe's objective of reversing the yen's appreciation. Prior to Tuesday morning's G7 statement, it had depreciated to 93.6 yen to the dollar. After the statement it slipped to 94.26 before the G7 official's comments triggered a reversal. As this was written Thursday morning in Moscow, dollar-yen was trading at 93.38.
The U.S. can scarcely complain, having urged Japan for years to stimulate its economy. The Bank of Japan is now running a more aggressively expansionary monetary policy, as the U.S. urged, and a consequence is a falling yen. Not everyone is happy with the result, to put it mildly.
U.S. officials may find it difficult to cast stones, because no one is more expansionary and tacitly devaluationist these days than the Fed.
The Fed, and to a lesser extent the BOJ have left the ECB in the dust when it comes to quantitative easing. While the ECB has said it stands ready to buy more sovereign debt for countries which can meet certain conditions, it has not thus far done so. And with European banks repaying their three-year Long-Term Refinancing Operation (LTRO) loans, the ECB's balance sheet is shrinking.
Meanwhile, the Fed is on pace to expand its already bloated balance sheet by another $1 trillion this year.
The net effect, to Europe's chagrin, is that the euro has been appreciating against both the dollar and the yen, but particularly against the latter.
Following the G7 statement, EU Economics and Monetary Affairs Commissioner Olli Rehn said a further rise of the euro "would impact relatively more on deficit countries of southern Europe because their exports are more price sensitive. This could affect negatively the rebalancing now underway in the Eurozone economy."
The Fed has said it plans to continue buying bonds at an $85 billion monthly pace to hold down long-term interest rates until it sees "substantial" improvement in the labor market outlook. And it has said it will hold short-term rates near zero "for a considerable time after the asset purchase program ends and the economic recovery strengthens."
The U.S. signed on to the G7 commitment to "market-determined exchange rates" and will no doubt do so again in the G20 communique. But the transparent reality is that Fed money creation is strongly affecting the foreign exchange market.
The U.S. was happy to go along with a G7 statement designed to bring about a truce in the so-called currency wars, but in terms of practical policy it made very little difference in how macroeocomic policy will be carried out over time. The Fed may eventually scale back its asset purchases and raise interest rates, but when it does it will be for domestic reasons -- not to appease countries that are upset about dollar depreciation.
The G7 and the G20 can inveigh against exchange rate misalignments and competitive devaluations all they want. They can even engage in rare instances of joint intervention. But coordinating monetary and fiscal policies to align the fundamentals underlying currency values is a much taller order.
Jim Rickards: Currency Wars Simulation
US Monetary Policy At Heart Of 'Currency War' Ahead Of G20
