Currency War aka Competitive Devaluation: Battlefield USDJPY Chart
There is a currency war going on right now
The concept of a currency war is not new and certainly currency wars have been waged before. According to prominent leaders, one is being fought right now by major economies around the world. The key players are central banks and economic policy makers of major economies like US, China, Japan and the European Union. According to Wikipedia,
Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets. However, the price increase for imports can harm citizens’ purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.
Since currency wars do not start with a formal declaration, it is not easy to pin down when the current one began. However, a number of prominent individuals can be credited for some observations.
- Brazilian Finance Minister Guido Mantega says “We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness”.
- Indian Prime Minister Manmohan Singh asks G20 to “at all costs avoid competitive devaluation‘ in November 2010.
- Author, lawyer, economist and investment banker James Rickards published bestseller Currency Wars: The Making of the Next Global Crisis on 10 November 2011.
- China National Gold Group Corporation General Manager Zhaoxue said at a forum on June 28, 2013 in China that “the United States intends to suppress gold to ensure the Dollar’s dominance, that the fall in the price of gold premeditated, and a part of the currency war.”
- The winner could be Chinese scholar Song Hongbing who published his Chinese bestseller Currency Wars in 2007.
Currency war on social media
In this conflict, the instruments of war are currencies, quantitative easing, Abenomics, interest rates, bonds, gold, crude oil and yes social media.
Follow to find out more.
Government owes $17 trillion. 50% inflation over 10 yrs cuts the real value of debt in half. Get ready for inflation. http://t.co/aKljTe1yYb
— Jim Rickards (@JamesGRickards) January 15, 2014
— In Gold We Trust (@KoosJansen) January 20, 2014
Then finally a map of one battlefield in this conflict – the USDJPY. Insert your own picture of Uncle Sam versus Sumo wrestler.
Players make their moves
- Late November 2008, US Federal Reserve starts buying $600 billion mortgage-backed securities. This is the start of QE or quantitative easing. USDJPY fall is a victory for US Dollar.
- 26 December 2012, Shinzo Abe becomes Japanese Prime Minister and brings in his own brand of devaluation ‘Abenomics’. This cheapens the Yen so should be a ‘counter-attack’.
- December 2013 FOMC meeting announces the US Federal Reserve’s intention to taper this month; consequence and intention unknown at this moment.
USD thwarted at moment
Since the objective of competitive devaluation is to cheapen one’s currency, Abenomics has help the Japanese Yen recover a critical multiple year level that supported the USDJPY prior to the financial crisis that started in 2008. Is 103.00 could be a victory condition for Japan?
Who are the real winners and losers?
As for small nations like Singapore, this currency war threatens our way of life. A decade of gains for the Singapore Dollar against the US Dollar has improved our purchasing power in Southeast Asia and kept imported inflation at bay; on the other hand, the nation is losing the export competitiveness that once earned the country a place among four ‘Asian Tigers’. Is the Singapore Dollar a winner or a loser?