Currency War Turns Stimulus War as Brazil Surrenders
The currency wars declared by Brazilian Finance Minister Guido Mantega are proving more a battle to salvage economic growth than a spiral of competitive devaluations.
While the yen and pound slide on the prospect central banks will intensify stimulus and South Korea’s won and Chile’s peso strengthen, volatility in the currency market is below its average of the past decade and global stocks have gained $2.15 trillion since the start of 2013. Policy makers reduced intervention over the past 12 months as foreign reserves grew at the slowest pace in four years, data compiled by Bloomberg show.
Even Mantega, who used war terminology in 2010 to criticize industrialized nations for policies that weakened their exchange rates, says he is abandoning efforts to push down the real. Federal Reserve Chairman Ben S. Bernanke and other policy makers signaled last week that currencies are a corollary, not a cornerstone, of policies to boost growth from unacceptably low levels, paving the way for what Morgan Stanley calls a third round of “Great Monetary Easing.”
“Central banks are going to throw the kitchen sink at reviving growth and spurring inflation because the alternative to that is deflation,” Neil Williams, head of economic research at London-based Hermes Fund Managers, which oversees about $42 billion, said in a phone interview on Feb. 27. “The countries that have overall loosened their policies most have had the weakest currencies. It’s not a blatant attempt to out-grow others, it’s just a case of all countries trying to do the same thing at the same time.”
As the central banks of Japan, the U.K. and euro area all hold policy meetings this week, demand for more stimulus is increasing. Capital Economics Ltd. calculates the Group of Seven major economies contracted on average in the last quarter for the first time since early 2009. The International Monetary Fund predicts growth in advanced nations of 1.4 percent this year, half the average pace of 1994 to 2003.
Nobel Prize-winning economist Paul Krugman calls the currency war a “complete misconception” and says the monetary expansion is in keeping with the mandates of central banks and should benefit global growth.
“It’s not a currency war,” the Princeton University economics professor told “Bloomberg Surveillance” with Tom Keene and Sara Eisen on Feb. 15. “This is monetary policy.”
At the same time, a growing number of leaders are concerned that central banks and governments will repeat policies of the 1930s, when countries devalued their way to expansion through exports, compelling trade partners to match the declines and triggering tariffs that contributed to the Great Depression.
“Not all currencies can depreciate by definition,” Adrian Lee, the president of foreign-exchange manager Adrian Lee & Partners, which oversees more than $5 billion from London and Dublin, said in a Feb. 27 telephone interview.
The election in December of Shinzo Abe as Japan’s prime minister heightened speculation the nation would manipulate its currency, with the yen weakening 17 percent in six months, according to Bloomberg Correlation-Weighted Indexes.
The likelihood of the U.K. and Japan increasing stimulus that will dim their currencies’ allure has analysts cutting year-end forecasts for the yen and the pound at the fastest pace among more than 50 currency pairs tracked by Bloomberg.
Sterling has weakened 5.2 percent and the yen fell 5 percent this year, the Bloomberg indexes show.
“The ultimate losers will be determined by the relative fundamentals,” Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London, said by phone on Feb. 26. “The currencies where the central banks actively engage in monetary easing should be the biggest losers, and, for the time being, that’s sterling and the yen.”
What’s stimulus to one nation amounts to an economic attack to others. Currencies in Chile, Malaysia, the Philippines and South Korea have strengthened against the dollar, with the won gaining the most of the group by posting a 3.7 percent gain in the past six months, threatening growth and eroding corporate profits. The won has strengthened 23 percent against the yen in the past six months.
Seoul-based Hankook Tire Co. (161390) said last week that its exports will be hurt as a weaker yen gives Japanese rivals such as Tokyo-based Bridgestone Corp. (5108) a pricing advantage. Samsung Electronics Co. (005930), based in Suwon, South Korea, said Jan. 25 that currency gains could reduce its operating profit by 3 trillion won ($2.7 billion) this year.
South Korea buys or sells foreign currencies in so-called smoothing operations and has also implemented restrictions on currency-forward positions to reduce the risk of speculative capital flows.
China is “fully prepared” for a currency war, should one happen, central bank Deputy Governor Yi Gang said in Beijing on March 1, the official Xinhua News Agency reported. The nation will “take into full account the quantitative-easing policies implemented by central banks of foreign countries,” Yi was quoted as saying by the agency.
Industrial economies that depend on commodities and exports, including New Zealand and Norway, have said they may intervene in foreign-exchange markets or cut interest rates to weaken their currencies. Switzerland already caps the level of its franc against the euro at 1.20.
New Zealand’s dollar, known as the kiwi, has appreciate 8.6 percent from last year’s low in May, while the krone has strengthened 5.7 percent from its 2012 low on July 30, Bloomberg Correlation-Weighted Indexes show.
“When the New Zealand dollar is coming under upward pressure, we want investors to know that the kiwi is not a one- way bet,” Reserve Bank of New Zealand Governor Graeme Wheeler said in a Feb. 20 speech.
The rhetoric is less heated than in late 2010, when Mantega said developed nations had debased their currencies at the expense of healthier economies such as Brazil. At the time, the real had strengthened more than 40 percent versus the dollar from its lows in 2008.
A year later, Russian leader Vladimir Putin said that the Fed’s strategy of printing dollars to buy Treasuries to inject cash into the financial system was evidence the U.S. was “being parasitic with the dollar’s monopoly position.”
“We neutralized, softened the currency war issue that other countries are facing,” Mantega said last week in an interview at Bloomberg’s headquarters in New York. “I didn’t invent the currency war, I just pointed out a problem that can be overcome with an accord among countries.”
The real has weakened more than 14 percent since Mantega’s 2010 war claim, trading at 1.9809 per dollar as of 12:01 p.m. New York time. Brazil has even sought measures to strengthen its currency this year after it depreciated to 2.1384 in December.
Central banks slowed the pace of intervention as foreign reserves grew 6.9 percent the last 12 months to about $11 trillion, according to data compiled by Bloomberg. Except for the global financial crisis in 2009, when reserves rose 6 percent in the year through February, it was the smallest increase since at least 2004.
The accord Mantega referred to came when Group of 20 finance chiefs met in Moscow on Feb. 15-16 amid rising tensions over the yen’s decline. All-night talks beside the Kremlin ended with officials pledging for the first time not to “target our exchange rates for competitive purposes.”
Currency war talk “has run further than the reality,” Singapore Finance Minister Tharman Shanmugaratnam said in a Feb. 28 interview. “There might have been a little bit of clumsiness in public statements, but there’s now I think a very good understanding amongst all the major players as to what’s appropriate.”
Alan Ruskin, the global head of Group of 10 foreign- exchange strategy at Deutsche Bank AG in New York, said the statement marked a “peace agreement” allowing countries to boost stimulus regardless of whether they weaken exchange rates so long as they don’t intervene in markets, target specific currency levels or buy foreign assets.
Central bankers are embracing the G-20 rulebook as a green light for more stimulus. Bernanke said last week that he backed Abe’s campaign for more stimulus even as it weakens the yen, saying it’s “mutually beneficial” if major economies that need to buoy growth take steps to do so.
“We are not engaged in a currency war,” the Fed Chairman told the Senate Banking Committee in Washington on Feb. 26. “Our monetary policies, which are being replicated in other industrialized countries, are increasing demand globally and helping not only our businesses, but also the businesses in other countries that export to us.”
Bank of England Governor Mervyn King said in Tokyo the same day that the global economy will benefit if central bankers pursue policies to boost growth, even if a byproduct is a weaker exchange rate.
“Domestic monetary policy is taken for domestic reasons, and if we do that then the world as a whole will expand and grow more rapidly,” King said. “It may push down the exchange rate a little bit, which makes life more difficult for other countries, but it increases total domestic spending, which will increase the demand for imports from emerging-market economies.”
The pound rose 0.3 percent to $1.5079 today, from as high this year as $1.6381 on Jan. 2. It touched $1.4986 on March 1, the weakest level since July 2010. Against the euro, it has depreciated to 86.17 pence, from 81.19 on Dec. 31.
While neither the Fed, European Central Bank nor Bank of Japan sold their currencies to influence exchange rates in the past year, some policy makers have commented publicly on what levels would be desirable.
In Japan, Deputy Economic Minister Yasutoshi Nishimura said on Jan. 24 that it wouldn’t be a problem if the exchange rate weakened to 100 yen to the dollar. It was at 93.32 today, from as strong as 77.13 on Sept. 13. Ruling-party lawmaker Kozo Yamamoto said in a Feb. 14 interview it would be “appropriate” for the yen to trade at about 95 to 100 per dollar.
While the Bank of England’s King denies targeting sterling, he and his colleagues have highlighted the benefits of a drop in the pound. Comments by ECB President Mario Draghi on Feb. 7 that the euro’s gains may affect the economic outlook led to its biggest drop in seven months.
“If you’re a central bank, you don’t mind if the currency goes down, but you can’t say it’s their goal,” said Roberto Perli, a managing director at International Strategy & Investment Group Inc. in Washington and a former Fed economist. “Central banks are just doing what they have to do.”
There are few signs of panic in the currency market. At 9.25 percent, JPMorgan Chase & Co.’s Global FX Volatility Index is below the average of 10.65 percent over the past decade. The index, which measures currency fluctuations, fell to 7.05 percent on Dec. 18, the lowest level since 2007.
Rising stocks suggest a broader stimulus story rather than a targeted devaluation effort, according to Kamakshya Trivedi, a London-based strategist at Goldman Sachs Group Inc. In Japan, the yen’s slide has been accompanied by a 15 percent rally in the Topix Index (TPX) this year. It touched 1,000 for the first time since 2010 today and closed at 992.25 in Tokyo, the highest level since April 27, 2010.
The result is “more consistent with a bout of monetary easing than with a currency war,” Trivedi said in a Feb. 19 report.
United Co. Rusal, the world’s largest aluminum producer, said today that Japan’s stimulus and the yen’s depreciation will be positive for exports and consumption of the metal.
The sluggish pace of global growth sets the stage for central banks to extend their five-year-old monetary easing into a third round after they beat back recession and then sought to spark growth, according to Morgan Stanley chief economist Joachim Fels.
The need to avoid excessive currency appreciation means central bankers are likely to be “indicating that rates could stay lower for longer, or even be cut further,” Fels’s London- based team wrote in a Feb. 20 report to clients. “Gear up for great monetary easing three.”
Abe is relying on Haruhiko Kuroda, his choice to serve as governor of the Bank of Japan, to pursue more aggressive monetary policy. The bank has already adopted a 2 percent inflation target and agreed to buy unlimited amounts of bonds from next year to meet that goal.
Kuroda said today that the BOJ will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases may start sooner than next year.
In the U.K., three out of nine policy makers, including King, voted for an increase in the bank’s target for bond purchases by 25 billion pounds to 400 billion pounds last month. More recently, some of King’s colleagues have discussed open- ended bond buying or introducing negative interest rates. Bank of Canada Governor Mark Carney, who will succeed King in July, has said central banks aren’t “maxed out.”
Draghi signaled Feb. 27 that the ECB has no intention of tightening monetary policy anytime soon with inflation set to “significantly” undershoot its 2 percent target next year.
Although some Fed officials have begun to express concern bond purchases may fuel asset bubbles or become tougher to unwind, Bernanke said last week that the central bank’s $85 billion of monthly purchases are supporting expansion, with little threat of inflation or overheating markets.
Elsewhere, central banks in Australia and Sweden haven’t ruled out easing further, while those of Hungary, Poland, Colombia and India all cut rates this year.
“This is not a currency war -- it’s a growth war,” said David Zervos, a managing director at Jefferies & Co. in New York, who served as a visiting adviser to the Fed in 2009.
Investors should buy stocks as part of a “reflation trade” and be wary of inflation in the longer term, he said.
“This is setting up to be an epic battle, with plenty of spoils for the victors and catastrophic losses for the vanquished,” he said. “Investors must pick sides early.”
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