Currency wars: Lose-lose or win-win?

Posted: February 4, 2015 in economy
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THE term “currency wars” has been bandied about ever since Guido Mantega, the Brazilian finance minister, used it in 2010. He was complaining that quantitative easing (QE) by the US was weakening the dollar, and prompting a response from other countries that did not want to lose export competitiveness. This time round, the dollar is strengthening, but the term is being used again.Currency volatility is on the rise, albeit from a low base. And David Woo of BofAML thinks this is a bad thing. In a research note, he argues thatFor many countries facing zero interest rates and binding fiscal constraints, the only policy tool left at their disposal to stimulate growth is aweaker exchange rate.So the ECB and the Bank of Japan’s QE programmes are designed, he thinks, to weaken their currencies; after all, bond yields are already so low that it is hard to see borrowing costs as a constraint for the corporate sector. (Incredibly, the yield on Nestle bonds turned negative yesterday.)Clearly, all currencies cannot decline, so it might be tempting to think this is a zero-sum game. But it is possible to argue that it is actually a win-win for the global economy; in attempting to depreciate their currencies, central banks reduce real interest rates and these lower real rates stimulate demand and investment.But Mr Woo argues instead that currency wars are a lose-lose. He writes thatHigher …

via Economic Crisis


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