War is a pretty strong word and one not often used in financial reporting. But there it is, over and over, the word war used in direct quotes and out of them. It’s the operative term to describe what is going on in currency markets.
We might be short of war, but clearly things have changed. Just today, the rhetorical level aimed at China’s mostly unchanging yuan is higher than before. And it’s been pretty high.
The U.S. Treasury Secretary, Timothy Geithner, still employs non-threatening words and won’t use China’s name. But, still… “When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same, and this sets off a dangerous dynamic,” Geithner said.
A Dow Jones Newswires headline this afternoon reads, “EU President: Europe Demands China Budge On Currency,” implying the comments earlier today of Chinese Premier Wen Jiabao in Brussels, in which he implored Europe’s leaders not to “join the chorus pressing to revalue the yuan,” fell on deaf ears.
Japan has intervened and the country’s central bank will launch more quantitative easing. The currency is still strong against the dollar. Chile has publicly worried about its too-high currency, as has Brazil.
Meanwhile, in the U.S., markets are reacting as if it is a signed-and-delivered deal that the U.S. Federal Reserve will embark on more quantitative easing of its own, knocking more starch from the weakened dollar. A distressing September jobs report, due for release on Friday, might be the final catalyst.
The world’s major nations have done a solid job since the start of the credit crisis and subsequent broad and deep recession of avoiding significant protectionist trade measures. It would be disappointing indeed to mitigate that necessary success with a no-holds-barred fight to gain advantage through weaker exchange rates.
It might not be up to China to stop all this, but some real rather than apparent relaxation of controls on the yuan by the Chinese government surely would help calm things down.