Denmark's second-most appreciated currency.

Photographer:Dmitry Beliakov/Bloomberg

Inside the Currency Wars

A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.
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Almost all the world’s currencies are dropping against the U.S. dollar. The decline is being driven mostly by governments and central banks bent on cheapening their currencies to gain an advantage in global trade and boost their weak economies. 

Since December, 22 major foreign currencies have declined an average of 4.5 percent against the greenback. A cheaper currency makes exports less expensive and thus more attractive to foreign buyers. A devalued currency also drives up import prices, which discourage domestic consumers from purchasing foreign goods. 

Group of 20 finance officials recently pronounced that the deliberate weakening of one's currency in pursuit of domestic growth is acceptable, while devaluation to gain a foreign-trade advantage is not. I fail to see the distinction, but U.S. Federal Reserve Chair Janet Yellen does. 

In Feb. 24 Senate testimony, Yellen opposed congressional efforts to add to trade agreements legal sanctions against countries that manipulate their currency because they could hobble the Fed. "Monetary policy," she said, "can have repercussions on exchange rates, but I really think it’s not right to call that currency manipulation and to put it in the same bucket as interventions in exchange markets that are really geared towards changing the competitive landscape to the advantage of a country.” 

But the Fed faces a dilemma: As other countries devalue against the greenback, the U.S. can't purposely knock down the dollar. As the world’s reserve currency, what could it be devalued against? A stronger dollar makes U.S. imports cheaper, which forces domestic producers to stay competitive by lowering prices and laying off employees to cut costs. A rising buck, then, works against the Fed’s goal of price stability and full employment. 

Currency movements are bedeviling other central banks, too. The Swiss National Bank was clearly among the currency manipulators when it pegged the franc at 1.20 to the euro in 2011. To maintain the peg, Switzerland's central bank had to continually sell francs to buy euros. In December, 42 percent of the Swiss National Bank's assets were in euros, the equivalent of 36 percent of Swiss gross domestic product.

But it suddenly lifted the peg on Jan. 15, a week before the European Central Bank announced it would soon begin buying government debt as part of a quantitative-easing program. The franc quickly rose 30 percent against the euro. The euro zone’s economic woes and Switzerland’s safe-haven status caused money to pour in. That pushed up the franc relative to the euro, to the detriment of Swiss exports. The Swiss economy is now paying the price: The CPI in January was down 0.5 percent from a year earlier. 

So why did the Swiss central bank stop the peg? The central bank president, Thomas Jordan, said the peg had served its purpose and besides, maintaining it wasn't sensible in the long run. I don’t find these explanations convincing. The interest-rate cuts that accompanied the de-peg announcement were fairly tame and unlikely to keep money out of Switzerland. 

Was the SNB pressured by its peers to stop manipulating the franc? Surely the foreign clients of Switzerland’s financial companies would not have been amused if the franc had followed the euro down after the ECB’s quantitative-easing announcement, which the SNB no doubt knew was coming.

 Denmark also pegs the krone to the euro. Exports equaled 54 percent of GDP in the fourth quarter of 2014, much of which went to countries in the euro zone. With the euro dropping before and after the ECB’s January announcement, and the Swiss ending their currency peg, the Danmarks Nationalbank is scrambling to keep the krone from appreciating above its 7.46 kroner-per-euro peg (it can range 2.25 percent above or below that). 

On Feb. 5, the Danish central bank cut interest rates for the fourth time in three weeks, to -0.75 percent. In January, the Nationalbank sold a record amount of kroner -- the equivalent of 9 percent of Denmark’s economy. Last month, the central bank’s foreign-exchange reserves jumped by 173 billion kroner to 737 billion kroner ($111 billion). Chairman Lars Rohde said the central bank “has the necessary instruments to defend the fixed exchange-rate policy for as long as it takes.” 

Unlike Switzerland, Denmark doesn't have a huge international financial sector to worry about as its currency falls alongside the euro. So I suspect the Danes will favor their export sector and keep the krone pegged

Call it currency manipulation or domestic economic policy, Denmark and almost every country in the world want their money to be cheaper.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
A Gary Shilling at insight@agaryshilling.com

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net