Foreign Policy Blogs

Global Currency War Reveals Shifting Power


There are mounting anxieties in Global capital markets over the divergence between China’s economic policies –  specifically, its currency exchange rate policies — and the relationship that currency valuation has to a sputtering economic recovery in the rich Western economies. In fact, as I noted about China earlier this year; and in one post last month, Brazil’s finance minister, Guido Mantega, publicly warned that central banks were engaged in an “international currency war” behind the scenes, and that Brazil would respond to protect its own economic national interests.  Using exchange rates “as a policy weapon” to undercut other economies and boost a country’s own exports ” would represent a very serious risk to the global recovery,”says both Dominique Strauss-Kahn of the International Monetary Fund (IMF), and former World Bank president and Columbia University nobel-winning economist, Joseph Stiglitz — and, if I can brag a little, one of my former Columbia professors. 

us-china-competing-flags-photo5A cautious response is emerging in global financial centers, and among central bank officials and finance ministers, highlighting the difficulty of securing international economic cooperation two years after the  global financial crisis began.  Above all, many argue, the present global economic recovery has shifted political power and global economic influence from the advanced Western economies, toward Asia and Latin America, whose economies have weathered the global recession far better than the US, the Euro-zone, and Japan. “We have come to the end of a model where seven advanced economies can make decisions for the world without the emerging countries,” said one European official involved in the weekend talks. Like it or not, we simply have to accept it.”

‘We have come to the end of a model where seven advanced Western nations can make decisions for the world without the input of emerging countries,” said one European official involved in the weekend talks. ‘Like it or not, we simply have to accept it.’

Meanwhile separately, the IMF sought to mediate a global currency battle over foreign exchange rates and currency valuations, and to restore global economic cooperation among all the international  stakeholders. While this week’s issue of the Economist, proposed measures on  ‘How to Stop a Global Currency War.’  The IMF’s chief executive, Dominique Strauss-Kahn, reiterated at a news conference that a weakening in the spirit of cooperation that grew out of the crisis was regrettable and said an adjustment in currency values must be part of economic rebalancing. “I think it’s fair to say that momentum is not vanishing, but decreasing and that’s a real threat,” he warned. “Everybody has to keep in mind this mantra that there is no domestic solution to a global crisis.”  Strauss-Kahn said he disliked the notion that a currency war was brewing because the term was ‘too militant’ in nature, but conceded ‘it was fair to say that many nations – including ours – have, and do, consider their currency as a weapon and that’s certainly not good of the global economy.’  Last weekend’s semi-annual meetings of the IMF and World Bank — and a Friday night session of the G-7 finance ministers — are expected to provide a forum for intense discussions about efforts to persuade China to let its currency rise and tamp down pressures for other emerging countries to control capital flows.


Global Currency War
Global Currency War

To be sure, this emerging debate and the ensuing conflict over global currency valuations is a pivotal issue of economic nationalism, and something I’ve written about before. World leaders broadly agree that for the global economy to be more stable, imbalances between creditor countries like China, Brazil and Germany; and that of debtor nations like the US and Britain have to be fixed: but the real question is, how..?? And, ‘who pays’..??  Nevertheless, the counter to the fix the “global imbalance” argument is that the global economic crisis, the ‘imbalance’ itself, was precipitated by Western industrial economies – who heretofore, wrote, controlled, and dictated the rules of global economic participation to their benefit and to the detriment of emerging economies – and it is patently immoral to coerce emerging economies to  stifle their growth and prudent economic stewardship to benefit and reward the wayward economic policies of the Western powers and its financial benefactors (eg, Wall Street). Opponents of this position argue that the answer lies in a coordinated global response where emerging economies have a greater stake in decision-making. Further, they contend, a ‘beggar thy neighbor’ approach by the Western economies is no substitute for making tough, prudent fiscal and economic decisions at home. Objectively speaking, that position –  as odious as it may be for some to accept – is, in my view, eminently and empirically defendable.


On the other hand, correcting those imbalances, some economists say, will help create jobs, and drive exports in the US, while reducing the threat of inflation and asset bubbles in China. In plain spoken language, what is meant by “correcting those imbalances” is that China and other emerging economies should forsake currency policies that are in its own economic self-interest, for the sake of rescuing the plight of self-inflicted, anemic Western economies. This shifting dynamic has most noticeably affected the US, which pushed more forcefully than its compatriots for stronger pressure on China but has been unable to persuade European allies to stand with us on this debate, given Europe’s own economic ties with China – and other emerging BRIC economies.  In general, the Europeans have taken a far more conciliatory line toward China than has the US, who in recent months has ratcheted-up the rhetoric. The well-regarded French finance minister, Christine Lagarde, noted wryly last week “It is not helpful to use bellicose statements when it comes to currency or to trade” negotiations.


fareed-zakaria-the-post-american-world4Another factor to consider is that the most dire impacts of the global economic crisis has passed, and many countries are now more concerned about their own national economies and no longer feel the urgency to act in global concert. For example, in interviews last week American and European officials involved in discussions over the Chinese currency debate outlined several reasons a unified position was so hard to forge. For one thing, China has moved adroitly to deflect criticism of its currency policies by pledging to move at a gradual pace and by pointing to other sources of global imbalances – such as volatile, risky and highly leveraged Western financial markets, and poor fiscal management by US and European central banks. That potent retort leaves Western finance officials reeling to strike the right balance between penance for our own failed economic policies, more forceful rhetoric, or patient economic diplomacy in cajoling China to act against its own economic interests. But noted economist Nouriel Roubini argues presciently in this commentary, that of necessity there must be “winners” and “losers” in the quest to improve the “imbalances,” — though it seems, at least in my eyes, to only be an “imbalance” when the advanced, wealthy economies are on the wrong side of the equation as we now find ourselves.  But the emerging economies are saying, essentially, ‘No, not this time…’  As a result, “We are moving from a consensual to a more confrontational period in global economic governance,” said Thomas Kleine-Brockhoff, a policy director at the German Marshall Fund of the United States, which promotes trans-Atlantic cooperation. Complicating the effort is a dispute between the US and Europe over how to change board representation within the IMF — and other global economic platforms such as the BIS (, theIMF, World Bank and the Basel Committee, among others — to give a greater voice to the fast-growing emerging economies that are largely driving global economic growth while the rich economies continue to be a drag on the global recovery. The Americans want emerging countries, especially China, to have more representation at the expense of European seats, and thus take on more responsibility. But Europe is refusing to give up its positions on the board.  Other officials have also quietly expressed worry that the US is itself contributing to the currency imbalance, noting that the Federal Reserve has adopted an expansionary monetary policy , or what is called ‘Quantitative Easing,’ intended to stimulate the economy, has contributed to the weakening of the dollar against other currencies.


Significantly, in the eyes of many countries, the US has lost some of the standing it needs to shape global economic policy. Not only is Wall Street viewed by many as having precipitated the global financial crisis, but also, a number of countries fear that policies by the Federal Reserve are pushing down the dollar’s value — the same kind of currency weakening for which Americans are vociferously criticizing China. “Other countries are no longer willing to buy into the idea that the US knows best on economic policy, while at the same time the emerging markets have become increasingly influential and independent,” said Kenneth S. Rogoff of Harvard and former chief economist at the IMF.  The tepid IMF response seems to indicate that the Renminbi’s exchange rate and the pending global currency war will again be a central discussion when the leaders of the G-20 nations gather next month in Seoul, South Korea. US Treasury officials indicate the US will continue to mount pressure on China in the weeks leading up to the gathering. Indicative of that, in a speech last Wednesday ahead of the IMF meeting, US Treasury Secretary Tim Geithner accused China of setting off a “dangerous dynamic” cycle of “competitive non-appreciation,” (ie, devaluation) in which countries block their currencies from rising in value to support their exports — as Japan, Brazil, South Korea and, surprise! – the US have recently done. Economists warn that this type of exchange policy could lead to a destructive and deflationary global currency war.

Other countries are no longer willing to buy into the idea that the U.S. knows best on economic policy, while at the same time the emerging markets have become increasingly influential and independent.

Edwin M. Truman, a former top official at the Fed and the Treasury Department, said that while Europe and Japan want the Renminbi to appreciate, “they don’t want the dollar to depreciate along with it.” A vital part of the American strategy has been to argue that China would also benefit from letting the Renminbi rise.  Allowing the Renminbi to rise would make Chinese exports more expensive and American exports cheaper. That would assist with rebalancing: getting China to spend and import more, and save less; while facilitating the US to spend less, increase savings, and export more.  Doing so, many economists argue, would reduce the risk of inflation and asset bubbles, and help reorient growth away from exports and coastal manufacturing areas and toward domestic consumer demand and poor rural regions in need of development. China signed on last year to a G-20 platform for “strong, sustainable and balanced growth” – which has become a sort of motto for global the recovery. But there is little agreement on how to make the motto a reality. 

James D. Wolfensohn, a former president of the World Bank, concluded the matter by noting that each side had a point. “The Chinese have a legitimate case that they have to keep their economy going and that they’re not going to let us run their economy for them,” he said. “On the other hand, we have a legitimate case that China ought to bear its share of the burden and show some leadership.”



Sources: Economic Times, Global Monitor, Naked Capitalism, NYTs, et al.

Video: Al-Jazeera World Business News

  • My understanding is that the yuan does not trade on an open currency market, therefore, the US Govt cannot easily buy large quantities of China’s currency.


Elison Elliott
Elison Elliott

Elison Elliott , a native of Belize, is a professional investment advisor for the Global Wealth and Invesment Management division of a major worldwide financial services firm. His experience in the global financial markets span over 18 years in both the public and private sectors. Elison is a graduate, cum laude, of the City College of New York (CUNY), and completed his Masters-level course requirements in the International Finance & Banking (IFB) program at Columbia University (SIPA). Elison lives in the northern suburbs of New York City. He is an avid student of sovereign risk, global economics and market trends, and enjoys writing, aviation, outdoor adventure, International travel, cultural exploration and world affairs.

Areas of Focus:
Market Trends; International Finance; Global Trade; Economics