The Dollar Is on a Rampage, But Not on the Attack

An unfortunate byproduct of the dollar’s unexpected surge has been the revival of a bogey that just won’t die: currency wars. The phrase gets thrown about during periods of dislocation in the foreign-exchange market and has the beauty of meaning whatever the person who utters it desires. Conflicts in the world of FX are usually difficult to win. They are even harder to spot.

The two words certainly attract attention. Once they force their way into discourse, they can be tricky to banish. More’s the pity because they obscure more than illuminate. There’s a strong case to be made that in the contemporary era that there are few true FX conflicts, much less military-style actions launched with the aim of gaining a competitive advantage for exports. The term is now being bandied around to describe a scenario where South Korea, Taiwan, Indonesia — and even China — are pushed into weakening their currencies to guard against the effects of a languishing yen. Never mind that Japan itself is very uncomfortable with its currency’s underperformance and working to limit the decline.

This is the problem with the martial analogies. They don’t stand up particularly well to scrutiny. More often than not, currency trends are a byproduct of something else. They reflect a sober view among investors of what underlying policy does to — or says about — an economy’s prospects. In this instance, the yawning gap in interest rates between the US and Japan is the primary culprit in the yen’s descent. Intervention and some hawkish noises from Tokyo have cushioned the blow a little. At its heart, this situation has little to do with exports.

To understand the term, and its flaws, you have to go back more than a decade. Brazilian Finance Minister Guido Mantega was wrestling with a pronounced rally in the real; the previous year it had climbed by almost a quarter against the greenback. He complained that this was the fault of the major industrial powers. They had been juicing their economies since the failure of Lehman Brothers Holdings Inc. through near-zero rates and quantitative easing. “We are experiencing a currency war,” Mantega told reporters in September 2010. “Devaluing currencies artificially is a global strategy.”