I've thought a bit more about the previous post where I suggested that not all measures affecting currencies should lead to fears of a "currency war". I'm not much of an expert in this area, and I'm happy to have someone explain to me where I'm going wrong, but until then I'm sticking with the view I expressed there. If the main goal of a measure is to promote economic growth, the incidental impact on currencies should not be deemed equivalant to an action which directly sets the currency value. Yes, there will be an effect on that value through various other actions, but a wide range of policies will have such an effect, and if all of these are brought under the general rubric of currency regulation, domestic economic policy will be seriously constrained.
At the same time, though, I can see the argument that if the degree of a particular fiscal and monetary policy action reaches a certain level, the effect on currencies is perhaps large enough that it becomes almost equal in impact to an intentional currency devaluation. Along these lines, the FT reports that Fed chairman Bernanke "supports a new monetary stimulus to battle high unemployment and head off the risk of a downward spiral in prices":
The increasing likelihood of hundreds of billions of dollars of further asset purchases by the Fed – a strategy known as quantitative easing – will heighten tensions in international currency markets by weakening the dollar further. That may prompt other central banks to follow suit with currency intervention or QE of their own.
...
“The implications for the dollar are stark,” said Michael Woolfolk, strategist at BNYMellon in New York.
“Not only do zero interest rates keep US interest rate differentials negative with most countries, but also QE measures are generally viewed to be corrosive to a currency’s value.”
Here's more, also from the FT:
Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro.
...
A senior European policy-maker, who asked not to be named, said a further aggressive round of monetary easing by the US Federal Reserve would be “irresponsible” as it made US exports more competitive at the expense of its rivals.
Simon Derrick, chief currency strategist for BNY Mellon, said: “In narrow terms, the US is winning the currency wars as a weaker dollar will help its economy, but it could damage the other big economic blocs of China, Japan and Europe.”
Here's the question I have: When fiscal policy (massive deficit spending) and monetary policy (near zero interest rates and quantitative easing) goes as far as the U.S. is taking it in an attempt to create growth, are other countries justified in treating this as a currency devaluation and taking action in response?
No doubt these actions will cause difficulties for them in the short run, in part related to the currency value. For example, there is likely to be an increase in capital inflows in some countries. Actions to temper these effects seem justified.
In the longer run, though, it seems to me that the necessity of taking action in response depends in part on what you, as an economic policy maker in another country, think the impact of these policies will be. If you think they will help the U.S. economy grow and gain an advantage, perhaps you feel threatened. As a response, you might do something similar yourself, or take actions to mitigate specific effects of the U.S. policies. On the other hand, you might also take the view that these actions are dooming the U.S. economy to many years of weakness, stagnation and inflation. If that's the case, you might just want to wait out any short term problems you face, and look forward to the not too distant future when your own economy is more competitive than the U.S. one.
