Currency wars are back, though this time the goal is to steal inflation, not growth.
Brazil Finance Minister Guido Mantega popularized the term “currency war” in 2010 to describe policies employed at the time by major central banks to boost the competitiveness of their economies through weaker currencies. Now, many see lower exchange rates as a way to avoid crippling deflation.
Weak price growth is stifling economies from the euro region to Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.
“This beggar-thy-neighbor policy is not about rebalancing, and not about growth,” David Bloom, the global head of currency strategy at London-based HSBC Holdings Plc, which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.”
Bloom puts it in these terms because, when one jurisdiction weakens its exchange rate, another’s gets stronger, making imported goods cheaper. Deflation is both a consequence of, and contributor to, the global economic slowdown that’s pushing the euro region closer to recession and reducing demand for exports from countries such as China and New Zealand.
Biggest Declines
After the Argentine peso, which is plunging following a debt default and devaluation, the yen will be the biggest loser among major currencies by the end of 2015. A 6.1 percent decline is predicted, which would build on a 5.3 percent slide since June.
The euro is also expected to be among the 10 biggest losers, with strategists seeing a 5.6 percent drop. The yen traded at 106.88 per dollar 7:23 am in London, while the euro bought $1.2733.
At 0.3 percent in September, annual inflation in the 18-nation bloc remains a fraction of the ECB’s target of just under 2 percent. Gross-domestic-product growth flat-lined in the second quarter, while Germany, Europe’s biggest economy, reduced its 2014 expansion forecast this month to 1.2 percent from 1.8 percent.
Disinflationary pressures in the euro area are starting to spread to its neighbors and biggest trading partners. The currencies of Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall from 4 percent to more than 6 percent by the end of next year, estimates compiled by Bloomberg show, partly due to policy makers’ actions to stoke prices.
While not strictly speaking stimulus measures, the Swiss, Danish and Czech currency pegs -- whether official or unofficial -- have a similar effect by limiting gains versus the euro.
Some central banks have GDP, rather than inflation, in their sights. That’s particularly true of exporters, for whom a lower exchange rate makes their goods cheaper.
New Zealand, where second-quarter annual inflation was the fastest in 2 1/2 years, announced last month its biggest currency intervention in seven years, sending the local dollar to a 13-month low.
