Brazil’s president, Dilma Rousseff, and her finance minister, Guido Mantega, are attacking the U.S. Federal Reserve for embarking on a third round of quantitative easing. By aggressively buying bonds, the Fed aims to push interest rates lower, and that will nudge the dollar down as well.
This will hurt Brazil and other developing-country exporters, Mantega says, and what’s more, it’s meant to. To him, the U.S. has declared “currency war.”
The Fed’s primary goal, however, is not to manipulate the dollar but to expand demand at home. It hopes to do this mainly by lowering interest rates and convincing investors that rates will stay low for a good while. This should encourage consumers to spend and companies to hire and invest. If these things happen, U.S. imports will rise, and exporters such as Brazil can expect to benefit.
Although Mantega is wrong about QE3, his wider concern about currency manipulation is right. Indeed, it’s an issue over which Brazil and the U.S. should make common cause.
Let’s be a bit more precise about who manipulates currency. The charge is best limited to nations that block the movement of currencies toward levels that would help balance global trade. If currency manipulation is defined this way, the leading offender is China. One measure is a country’s growth in foreign exchange reserves: Manipulators hold their currencies down by using domestic money to buy foreign assets. Recently, and especially over the past year, China has eased this policy, but its foreign exchange reserves still stand at a colossal $3.2 trillion.
We favor adding currency oversight (and the sanctions that might go with it) to the duties of the World Trade Organization or the International Monetary Fund. This makes excellent sense because currency manipulation can add to trade policy friction and vice versa, in a cycle of mutually assured disadvantage.
Currency manipulation already violates WTO and IMF rules, but there is no enforcement. This should change. Meanwhile, Mantega and other finance ministers need to be more careful about whom they accuse of waging currency war. The U.S. isn’t among them.