Currency Management Norms Under Threat

May 23, 2016

A statement released April 15 by G20 finance ministers and central bank governors reaffirmed a position against currency manipulation that represents a coordinated stance that’s been in place already for a long time:

Excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.  We will consult closely on exchange markets.  We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.  We will resist all forms of protectionism.  We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.

A subset of the signers to that view representing the United States, Japan, Canada, Germany, France, Italy, Great Britain and the eurozone, gathering this past weekend in Japan revealed rising tension over the shared vow not to interfere with currency market forces.  For decades, there’s been agreement that a role needs to be preserved for governments to act to counter extreme currency market disorder, when breath, depth and market resilience seriously break down, but such instances seldom arise.  At the weekend meetings in Sendai, however, Japan’s finance minister called recent behavior of the yen “one-sided and speculative,” implying that if such intensified or even just continued intervention might become appropriate.  Led by the U.S. delegation, Japan’s position was resisted.  A message was conveyed to Japan that a justifiable case does not really exist for it to undertake yen intervention sales.  A separate effort by Japanese officials to secure coordinated fiscal stimulus was likewise rejected.  Aggregate demand is too weak, but governments are on their own to decide what, if any, policy changes to engineer to rectify the deficiency.

As background, U.S. politicians and bureaucrats had become increasingly worried about the possibility of intensifying currency wars.  The Treasury Department just three weeks ago released a semi-annual Report to Congress on Foreign Exchange Market Policies of Major Trading Partners of the United States.  The report unveils more specific criteria centering on three thresholds to warrant closer scrutiny that presumably might lead to designating a government a currency manipulator.

  • Does a country have a material current account surplus, that is exceeding 3% of GDP?
  • Does it have a significant trade surplus in bilateral commerce with the United States, that is of $20 billion or more?
  • Is its government engaging in persistent one-sided foreign exchange intervention that exceeds 2% of GDP in size?

Although no trading partner was declared a currency manipulator this time around, five trading partners met two of the three conditions.  China, Japan, Germany and South Korea satisfied the first two criteria, and Taiwan met the first and third.  Officials noted that if not for heavy capital outflows from emerging markets, which led to intervention support rather than sales by many governments, it’s quite conceivable that some governments could have met all three conditions.  If Japan made good on its predisposition to intervene for the first time since 2011, it would certainly draw even keener attention.

Moreover, all this posturing could be mere prologue to a radical policy shift should U.S. voters elect Donald Trump president.  The unsaid but widely understood suffix to his campaign’s slogan, Make America Great Again, is “at the expense of friend and foe.”  The Republican candidate has espoused protectionist views that one way or the other would rebalance U.S. trade in a decidedly advantageous way.  Meanwhile, the Democrats have also become more protectionist-minded under the influence of Bernie Sanders’ crusade for a political revolution.  Since the end of the Second World War, the United States has been a leader in a series of global agreements to make international commerce freer and less corrupted by protectionism.  With that role now starting to unravel, one can only wonder how much longer governments will even bother to give lip service to the goals expressed in the quote at the top of this update.

Protectionist thinking always picks up in times of weak economic growth.  The table below compares economic growth last quarter from the final quarter of 2015 expressed at an annualized rate (column one) and from the first quarter of last year (column two).  The table also shows economic growth between the first quarter of 2014 and the first quarter of 2015, which underscores that the world is experiencing a multi-year period of modest demand rather than a single year’s slippage.

% change 1Q vs 4Q15 1Q16 vs 1Q15 1Q15 vs 1Q14
U.S. 0.5% 2.0% 2.9%
Japan 1.7% 0.0% -1.0%
Euroland 2.1% 1.5% 1.3%
U.K. 1.6% 2.1% 2.6%
China 4.5% 6.7% 7.0%


The temptation to depress one’s currency to promote growth increases at times like these when inflation is subdued and interest rates are low.  Over the most recently reported twelve months, consumer prices rose just 1.1% in the United States and 0.3% in the U.K., and such fell 0.2% in Euroland and 0.1% in Japan despite aggressive quantitative monetary stimulus in both economies.  Ten-year sovereign debt yields over the past year have dropped 51 basis points in Japan, 49 basis points in Great Britain, 45 bps in Germany and 38 bps in the United States. 

Finally, compared to a year ago, the trade-weighted dollar is insignificantly changed.  In contrast, the trade-weighted yen has appreciated 10.5%, and the trade-weighted euro is some 3% higher.  Overshadowed by the possibility of the U.K. abandoning the European Union, the trade-weighted pound has fallen by 5.5%.  And since a currency policy shift last August, the trade-weighted Chinese yuan has dropped about 7%.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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