Currency War Is Now a Dud as Windfall From Devaluations Vanishes

Currency wars, it turns out, may not be worth fighting right now.

While weaker exchange rates have at times throughout history helped stoke economic growth by making countries’ exports cheaper, the benefits are becoming hard to find.

Nowhere is this more apparent than in developing nations, where currencies have slumped 25 percent on average against the dollar since 2011. Despite this, their annual export growth rate has slowed to 4 percent in the past four years from 8 percent during the previous decade, according to the CPB Netherlands Bureau for Economic Policy Analysis. In Brazil, the real’s 48 percent plunge since the start of 2011 has done little to revive an economy heading for its worst performance in 25 years.

“The relationship between global growth and trade is breaking down in a way that we cannot apply the past relationship to predict the future,” Stephen Jen, a former International Monetary Fund economist who’s co-founder of SLJ Macro Partners LLP in London, said by phone. “It now takes a bigger devaluation to have the same benefit.”

Analysts point to a couple of key reasons for the change: the fading effect of what were one-off factors that buoyed trade years ago, such as the push by countries to cut tariffs; and China’s shifting growth strategy.

‘Plateaued Out’

As the government focuses more on the domestic economy and promoting growth in the service sector, China’s demand for imports, while still growing, is slowing.

“Globalization has plateaued out,” Bhanu Baweja, the London-based head of emerging-markets cross-asset strategy at UBS AG, said by phone. “A weaker currency helps, but it’s not going to bail you out.”

Speculation, nonetheless, is growing that countries across the world are stepping up efforts to weaken their exchange rates, a trend that then-Brazilian Finance Minister Guido Mantega famously labeled “currency wars” back in 2010. More than 20 countries have cut interest rates or taken other measures to ease monetary policy -- moves that can curb demand for their currencies -- since the start of the year.

All major currencies fell against the dollar since the beginning of 2014, with 10 of them dropping more than 20 percent, including the ruble, Norwegian krone and euro. Not all countries, of course, are trying to weaken their currencies. The ruble, krone and even the real, for that matter, have tumbled in part because of the decline in prices for their commodity exports.

IMF Study

The International Monetary Fund did a recent study that illustrates why these currency declines are providing less help to a country. For every 1 percent increase in global economic output, trade rose 0.7 percent between 2008 and 2013. That’s down from 1.5 percent in seven years through 2007 and 2.2 percent between 1986 to 2000, according to the IMF.

While the benefits of a weaker currency are harder to detect, it doesn’t mean they’ve disappeared completely.

One quick way to see that is by looking at how investors bid up European stocks after the euro fell to a 12-year low against the dollar, a sign they anticipate some economic gains to follow. The Stoxx Europe 600 Index has gained 15 percent this year, compared with a 0.1 percent increase in the Standard & Poor’s 500 benchmark.

The euro’s decline “is obviously helping the European area a lot,” Jim O’Neill, former chairman of Goldman Sachs Asset Management and a Bloomberg View columnist, said in an interview with Bloomberg Television March 13. “But it’s not creating extra demand. It’s just at the expense of somebody else through competitiveness.”

No Panacea

Yet a currency decline isn’t a panacea. Brazil’s sinking exchange rate, for example, has failed to buoy Latin America’s biggest economy. Analysts in a central bank survey last week predicted its gross domestic product will shrink 0.8 percent this year, the worst recession since 1990. The currency’s drop instead pushed annual inflation to a decade-high 7.7 percent in February, prompting the central bank to raise interest rates even as the economy sputters.

“Currency depreciation is the easiest way out, at least for the short term, but it will lead to severe consequences if it’s not accompanied by structural reforms,” Shweta Singh, a London-based economist at Lombard Street Research, said by phone.

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