Currency Wars

Real wars have guns, and trade wars are fought with weapons such as tariffs. Currency wars, on the other hand, are stealth battles — no country ever wants to admit that it’s waging one. They surface when policy makers are accused of deliberately driving down exchange rates — or fixing them too low — to gain a competitive advantage. A weaker currency means a country’s exports can be sold more cheaply overseas, providing a jump-start to the economy at home. Things really heat up, though, when suspicious nations retaliate. After years of largely unspoken tensions, U.S. President Donald Trump’s tweets and the actions of his administration have brought hostilities into the open, raising concern about an unraveling of decades of global pledges to refrain from combat using currencies.

U.S. officials have at various times accused China, Germany, Russia and Japan of gaining an advantage by acting to keep their currencies undervalued. At the same time, Trump has been moving away from the decades-long “strong dollar” policy by saying he’d prefer a weaker currency as a way to increase exports, narrow the trade deficit and boost profits for U.S. companies. He might be starting to get his own way, as the Federal Reserve backtracked on interest rate hikes that had put pressure on the dollar to strengthen. As the U.S. and China traded blows with tit-for-tat tariffs, China allowed the yuan to weaken below the symbolic level of 7 to the dollar — a line it hadn’t crossed in over a decade — raising alarms that the currency might be “weaponized” and prompting the U.S. Treasury Department to officially brand China a currency manipulator. China’s central bank rejected the allegation, saying the market had determined the yuan’s recent depreciation and that the U.S. move to label it a manipulator would cause global financial turbulence.