Ilene Grabel
I’ve written on a few occasions about the “currency wars” and the divergent responses to its macroeconomic fallout by policymakers across the developing world. (For a primer on the issue, see my earlier posts.) Until recently, the currency war garnered little global attention—likely because of its geography. The pressures generated by appreciating currencies were largely a problem for rapidly growing developing countries. The currency war was therefore not seen as a “universal” problem that threatened global financial markets, the world economy, or relations among powerful nations. This misguided view obviously failed to acknowledge that any hope for global recovery rests with the continued growth of the larger developing economies. The other factor that kept the currency war off the global agenda was the dismal state of the US and European economies. Economic stagnation in these countries precluded much attention there to problems abroad that policymakers in the US and Europe could only dream about—too much growth and capital inflows.
But things are changing in ways that make it impossible to ignore the issue for much longer. While investors remain pessimistic about the prospects of the US and European economies, they are nonetheless moving funds not just to the rapidly growing developing countries but also to wealthy countries, most notably Canada, Switzerland, Australia, New Zealand, and Singapore. The currencies of these countries are now appreciating dramatically against the euro and the dollar. The Swiss franc reached all-time highs against the US dollar and the euro this year, the Australian dollar has hit three-decade highs against the US dollar, and the Canadian dollar is approaching record levels as well. Among the 16 major currencies in the world, the Swiss franc, New Zealand dollar, Japanese yen, Brazil’s real and Singaporean dollar have gained the most against the US dollar in the past three months. A Swiss banker put it well last week: “The franc is like the new gold.” As in the developing world, asset bubbles, currency appreciation, inflationary pressures, and risk of a sudden reversal of capital inflows are weighing heavily on policymakers, manufacturers and exporters in a growing number of safe haven countries.
Read the rest of this entry »