IMF-G7 Weekend Will Just Hurt the Dollar More
Central bankers and finance ministers from around the world are converging on Washington, DC this weekend to discuss, among other things, the global wave of currency devaluations. But the most likely thing the meetings will accomplish is to propel the major and emerging market currencies even higher against the US dollar.
This all comes amid what some have called a “currency war,” efforts by central banks to manipulate home currencies regardless of their effects on other currencies. Everyone is doing it – either passively or actively.
South Korea and Brazil are using passive measures to counteract the effects of speculation that has boosted their currencies to alarming levels. South Korea’s currency, the won (KRW), has appreciated by 14% against the dollar since May 2009. Meanwhile, the Brazilian real (BRL) has gained by 10% this year alone. Remember, a strong currency is bad for exports. So Brazil and South Korea have implemented local restrictions, hoping to curb demand for both the won and real. South Korea is set to audit FX transactions beginning this month, and Brazil’s government has doubled the investment tax for foreigners.
Other countries have turned to physically intervening in markets. Peru, for instance, has been buying hundreds of millions of dollar-based derivative contracts while selling Peruvian sols. Japan’s efforts have been a bit bigger, intervening in FX markets late last month to the tune of almost $24 billion.
In short, developing and emerging market economies are actively, and independently, working towards their own economic goals or foreign exchange rate targets. And that’s bad news for the United States, which needs a weaker currency to increase the competitiveness of its goods abroad. It also needs a weak dollar to boost domestic earnings when international profits are repatriated back home.
The clashing goals of the United States and the rest of the world will play out at the meetings this weekend. And it’s possible there will be a global agreement among countries for multilateral or coordinated FX intervention similar to ones seen in the Plaza (1985) and Louvre (1987) accords. Such a move would temporarily shock the markets.
But it’s difficult to see the countries coming up with a deal the United States can get behind. And without US backing for a broad-based plan, those efforts are likely to have temporary and short-lived results. Both Plaza and Louvre accords helped to address massive currency issues back in the day – with the US dollar playing a key role in both.
Then there’s China. For almost seven years, US officials have been calling for a revaluation of the Chinese currency, the yuan (CNY). The requests have only grown louder as economic growth slowed in the United States over the last couple of years. Europe has even joined the chorus in recent weeks, pleading with Chinese officials to allow the yuan to appreciate to a higher level.
Left unasked is why Chinese officials should listen when other countries – both emerging and developing – are allowed to manipulate their currency rates as they see fit. Global financial leaders, as a result, may only revert to verbal jawboning over speculators and their individual efforts in order to stand firm on current Chinese currency policy.
So, given the complexities of current monetary and economic situations, it is highly unlikely that anything solid will result from this weekend’s bout of meetings. Without any colossal release in the form of a multilateral effort or US-backed dollar appreciation plan, it looks as if US dollar weakness may continue to be en vogue for the rest of the year.