Brookings Institution's Wessel: 'We May Be on Verge' of Currency War
Wednesday, 17 Sep 2014 07:57 AM
By Dan Weil
The global economy "may be on the verge" of a currency war, as the Bank of Japan and European Central Bank (ECB) ease policy vigorously to stimulate their moribund economies, says David Wessel, director of the Brookings Institution's Center on Fiscal & Monetary Policy.
Countries seek to depress their currencies to boost exports. A weaker currency makes a country's exports cheaper in foreign currency terms.
"Japan has already managed to depreciate its currency," Wessel writes in The Wall Street Journal. The dollar hit an almost six-year high against the yen Friday and traded at 107.33 yen Wednesday morning.
Japan's economy shrank 7.1 percent in the second quarter.
"Now the spotlight is shifting to Europe," Wessel warns. The eurozone registered zero growth in the second quarter.
Earlier this month, the ECB intensified its monetary stimulus, cutting interest rates and announcing it will purchase asset-backed securities.
"What's the ECB to do? Push down the euro to try to juice the eurozone's exports," Wessel explains. "That appears to be one of ECB President Mario Draghi's current objectives."
The euro reached an eight-month low against the dollar earlier this month and traded at $1.2958 Wednesday morning.
"For now this isn't a big threat to the U.S. economy. The U.S. dollar has been strengthening for some time, initially because nervous investors were looking for safety and more recently because markets expect the Fed to begin raising interest rates from rock-bottom levels next year, well before the ECB does."
The outcome of a currency war might be quite ugly.
"If both Japan and the euro area go for extensive QE [quantitative easing], emerging markets in Asia would suffer as their currencies appreciate," Diana Choyleva, head of macroeconomic research at Lombard Street Research, writes in a commentary obtained by CNBC.
"There would be no way China could restart its sputtering growth engine without major yuan devaluation. This in turn, together with likely higher U.S. interest rates, would be a lethal combination for the euro area."
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