Root causes of currency wars | vox


Simon J Evenett, 14 February 2013

Discussion of currency wars has broken out again in the run-up to this week’s G20 finance ministers’ meeting in Moscow. This column points to the underlying policy choices responsible for the recurring currency disputes and the feeble ex-post rationalisations for them.


Once dismissed as self-serving grandstanding by the Brazilian finance minister in 2010, claims that the world is closer to a currency war have returned. This time the proximate cause appears to be the publicly stated policies of the new Japanese government aimed at shaking off a decades-long economic malaise. Is this another flash in the pan – or are there deeper factors at work (Bordo et al 2012)?

The recurring ‘currency wars’, however, are not random, inconsequential events. Until the economies of the major trading powers recover or there is a significant shift in national policy mixes, we should expect the currency war to keep breaking out like a rash. This has important implications for the associated blame game.

The inevitability argument

There is an air of resignation – almost of inevitability – to some commentary on today’s currency war. Broken down, the argument goes like this. It starts by noting the widely shared view that one of the major lessons from the 1930s is that economic crises such as these require active monetary policy (Eichengreen 2013). Pumping liquidity into the banking system etc. is seen by many as a legitimate role of central banks during crises. In a world of relatively freely flowing capital and at a time when most large industrialised and developing countries have eschewed managed and fixed exchange-rate regimes, then national monetary policy decisions are likely to affect nominal currency values.

When interest-rate differentials and exchange-rate movements have adverse knock-on effects for trading partners, then accusations of currency war follow. While the major industrial economies remain in the doldrums, differences in timing of monetary policy easing and the like will result repeated charges of beggar-thy-neighbour policymaking and so the currency war reads like a book with many chapters. Before unpacking this chain of logic a little more, it is first worth noting that the apparent inevitability has led to the five rationalisations for the current currency war.

Five rationalisations for the currency war

Accusations that governments have engaged in a currency war have met with several robust responses. As we will see, these responses are themselves pretty revealing. They are:

1. The ‘just following orders’ defence.

This defence was put well by Philipp Hildebrand, the former head of the Swiss National Bank, in an op-ed piece in this Tuesday’s Financial Times (Hildebrand 2013). In his view, central banks haven’t declared war on trading partners. Rather they’ve sought to revive their national economies taking steps – and this is important – that are entirely consistent with their legal mandates. Of course, critics will hardly be satisfied (a) as the cross-border adverse knock-on effects of monetary easing are what they are, (b) just because something is allowed doesn’t mean it is the right thing to do and (c) that this defence demonstrates just how parochial central bank mandates are.

2. The ‘no malice’ defence.

In their statement this week the G7 implicitly proffered this defence (G7 2013). Monetary policy that does not seek to target exchange rates is fine on this view. No harm was intended, so what’s the problem? Critics will point to the adverse effects of monetary easing on trading partners and won’t be satisfied with assurances on intent.

3. The omelette defence.

The omelette defence is the ultimate acknowledgement of the inevitability argument. If “you can’t make an omelette without breaking a few eggs”, and assuming you want an omelette, then accept the fate of the eggs. Seeing their commercial interests and economic recoveries treated as such eggs is exactly what worries policymakers in emerging markets.

4. The ‘grabbing headlines’ counter-attack.

It is said that sometimes that attack is the best form of defence. In this case this amounts to arguing that those who raise currency war concerns are trying to deflect criticism away from their own policy choices. Accusations of beggar-thy-neighbour acts by trading partners are merely a smoke screen for failed domestic policies on this view. This week’s news reports suggest that the governments worried about the currency war have spread beyond the ‘usual suspects’, so not every critic may be vulnerable to this counter-attack (FT 2013).

5. The Connally defence.

The omelette defence isn’t the only hardball option available to large countries engaging in monetary easing. The fact that prior criticism doesn’t appear to have altered central bank behaviour suggests that there may be another element in their calculations. Those engaging in monetary easing and in some cases direct currency intervention (such as the Swiss) may have concluded that their trading partners either wouldn’t dare or ultimately wouldn’t care enough to retaliate or that the policy options available to harmed trading partners are so unpalatable (such as putting in place capital taxes and controls or resorting to widespread protectionism) that those options would not be implemented. This is a version of the Connally defence named after the US treasury secretary who reacted to European criticism of US economic policy in 1971 by saying: “The dollar is our currency, but your problem.” On this view, the rest of the world needs to adjust to the reality of monetary easing and live with its consequences. One might ask what assumptions are being made about foreign acquiescence and whether foreign governments see the policy choices before them in the same way – and whether they are right.

The status quo, then – which has led to repeated outbreaks of the currency war – has plenty of defenders. Were there really no alternatives?

Was the currency war inevitable?

Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war.

Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries.

There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war.

The key question to ask if whether emerging market governments would have been so critical of quantitative easing and the like if the policy mix of the industrialised countries contained more measures that offset the harm done by easing-induced currency devaluation? Arguably not. The root causes of today’s currency war lie not just in parochial monetary policy choice but in the backlash against fiscal stimulus packages and the political unviability of trade reform in the major industrialised economies. Pointing fingers at Japan misses the point. The responsibility for this latest outbreak of parochial decision-making goes much deeper.


Bordo M, Owen F Humpage and Anna J Schwartz (2012), “Notes for currency wars: The trilemma of international finance“,, 18 June.

Eichengreen, Barry. (2013). “Currency War or International Policy Coordination?” Journal of Policy Modeling, January (forthcoming).

Financial Times (2013). “Currency war fears spread across Latin America”, 13 February.

G7 (2013). “Statement by the G7 Finance Ministers and Central Bank Governors”, UK Treasury, 12 February.

Hildebrand, Philipp (2013). “No such thing as a global currency war”, Financial Times, 12 February.

Root causes of currency wars | vox

Bank of England | Publications | News Releases | News Release – G7 Statement


“We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.”

Bank of England | Publications | News Releases | News Release – G7 Statement

OANDA: Week In Review January 28th to February 1st

by Dean Popplewell


Week in FX Europe – Dollar Perception Has the EUR Appreciating
Quantitative Easing or QE has been the main driver of exchange rates and it will probably remain this way for some time. The change in the balance sheet values of the ECB and the Fed has had an extreme effect on the value of the ‘single’ currency. More importantly, the Fed and ECB actions over the past week points towards a continuation of this EUR strength.

Week in FX Americas – The Loonie Bears Had Their Wings Clipped
The loonie was supposed to weaken this week, only because everyone said so. However, the currency took off in one direction and that was higher. The bears did get a bit of a reprieve after Friday’s tepid US employment results, but at parity, there is ‘no harm no foul.’ The US jobs report now deflates fears of the Fed pulling back stimulus, supporting both equities and bonds and hurting the greenback somewhat.

Week in FX Asia – The Kiwis Gave Us “The Hobbit” And Now An Expensive “Dollar”
While the Yen is getting battered against all currencies on the grounds that the Japanese government wants that to be so, the Kiwi is rallying. Governor Wheeler at the RBNZ has been the main catalyst for this appreciation. All week the market has heard hawkish comments come from his office. On Wednesday, the RBNZ chose to leave the OCR unchanged at +2.5%. The Governor is bullish about New Zealand’s economy, saying “economic indicators are improving here and with many of our trading partners” and “positive global sentiment is resulting in lower bank funding costs and reduction of credit costs for both households and firms alike.”
ASIA Week in FX


  • AUD Reserve Bank of Australia Rate Decision
  • EUR Euro-Zone Retail Sales
  • AUD Unemployment Rate
  • EUR European Central Bank Rate Decision
  • CNY Consumer Price Index
  • EUR German Consumer Price Index
  • CAD Unemployment Rate s

February 2, 2013

The contest “01 – Y2013 Contest (MG-PT)” completed this weekend the first 5 weeks.
The first five weeks were equilibrated with a CPL slightly negative.

See details below.

Portfolio Return (MG-PT account):






01 – Y2013 Contest (MG-PT)

Statistics reflect account status as of February-03-2013 00:00


Deutsche Bank Beats Capital Adequacy Goal; Shares Rise – Bloomberg


Deutsche Bank AG (DBK), Europe’s biggest bank by assets, posted a fourth-quarter loss that exceeded estimates after the company eliminated more than 1,400 jobs and set aside 1 billion euros ($1.35 billion) for legal expenses.

The loss of 2.17 billion euros, the biggest in four years, was about eight times larger than the consensus analyst forecast. It compared with a profit of 147 million euros in the year-earlier period.

Deutsche Bank Beats Capital Adequacy Goal; Shares Rise – Bloomberg

Europe’s next challenge: A strong euro – Jan. 30, 2013


The euro rallied to a 13-month high Wednesday, as fears of a financial meltdown in Europe continue to abate, thanks in large part to the European Central Bank.

Last year, ECB president Mario Draghi pledged to do whatever it takes to preserve the currency.

More recently, the ECB said that European banks had repaid €137 billion worth of emergency loans, raising hopes the financial sector is on the mend.

“The last euro bear seems to have died on Friday,” analysts at Nomura proclaimed in a research note, saying the currency market is showing signs of “EURphoria.”

The euro is now firmly above $1.35, topping a key technical level that analysts say could pave the way to $1.40.

That’s a far cry from where it was at the height of Europe’s debt crisis last July, when it fetched about $1.20.

Europe’s next challenge: A strong euro – Jan. 30, 2013

What Investors Should Know About Foreign Exchange – TheStreet


OANDA Corporation has transformed the business of foreign exchange through an innovative approach to forex trading. The company’s leading online trading platform, fxTrade, introduced a number of firsts to the marketplace, including immediate execution; instant settlement on trades; trades of any size between one unit and 10 million units; and interest calculated by the second. The company’s many awards attest to the power and flexibility of its trading platform. In 2012, OANDA was named “Best Forex Provider” by the Financial Times and by Investors Chronicle; “Best FX Broker” by Forex Magnates; and was recognized by Investment Trends Singapore as providing “Best Value for Money” and “Highest Overall Client Satisfaction”.

OANDA was the first online provider of comprehensive currency exchange information, and today the company’s OANDA Rate® data are the benchmark rates for corporations, auditing firms, and global banks.

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What Investors Should Know About Foreign Exchange – TheStreet

LTRO flow | FT Alphaville


From the ECB on Friday:

As announced by the Governing Council on 8 December 2011, counterparties have the option to repay, after one year, any part of the amounts that they were allotted in the longer-term refinancing operations settled on 21 December 2011 and 1 March 2012, on any main refinancing operation settlement day. Accordingly, on 30 January 2013 EUR 137159.10 million will be repaid in the tender 20110149 by 278 counterparties.

That’s around 30 per cent of the first three-year LTRO being sent back to the European Central Bank by 278 banks. The second three-year LTRO will become repayable from the 27th of February, with its initial announcement coming on the 22nd.

The €137bn or so being repaid this time is higher than the market expected, but not shockingly so.

LTRO flow | FT Alphaville

Week in FX Asia – Abe’s Cohorts Will Stand In The Way Of A Rising Yen | OANDA Forex Blog


  • Yen Surges to Near 91 after Minister’s Comments
  • Higher Taxes and Mortgage Requirements Turn Off Deals in Singapore
  • Japan’s Deputy Economy Minister Endorses Yen at 100
  • Aussies Slow Inflation Brings The RBA In Play
  • India, World’s Largest Gold Buyer, Raises Import Taxes
  • Australian Consumer Prices Gain Less Than Forecasts
  • BOJ’s Impact on the Yen
  • Yen Rises for Third Day Before Price Data
  • Deferred Actions from BOJ put pressure on Abe’s Stimulus Package
  • Yen on The Prowl; AP delayed
  • BOJ Adopts Abe’s 2% Inflation Target
  • BOJ’s next move will be under the Microscope
  • Offshore Trading of Yuan has Estimated to have Doubled to $6 billion a day
  • Japanese Stimulus Seen Boosting Southeast Asia
  • Singapore Dollar Losing Luster to Higher Returns
  • No more cheap labor? China’s growth at risk
  • SEA currencies to gain against SGD in 2013

    Week in FX Asia – Abe’s Cohorts Will Stand In The Way Of A Rising Yen | OANDA Forex Blog

    Week in FX Europe – EURO Landing Continues To Have Opportunities | OANDA Forex Blog


  • Record High Unemployment Marred Rajoy First Year
  • Greece Brings Charges Against Statisticians
  • UK Unemployment Fell to 7.7% 18 Month Low
  • France Plans to Implement Financial Transaction Tax
  • BoE Governor Says More Needed to Restore Confidence in Banks
  • Bank Of Spain Says Recession Has Deepened
  • Potential for UK to leave EU before 2017
  • Draghi Says ‘Darkest Clouds’ Over Europe Have Receded
  • U.K. to Have Referendum on Leaving EU by 2017
  • Positive and Negative Signs for the EuroZone in 2013
  • Disagreements expected over ESM Funds Meeting

    Week in FX Europe – EURO Landing Continues To Have Opportunities | OANDA Forex Blog