currency war

Brazil’s cutting its IOF financial transaction tax to zero for foreign investments in local bonds makes perfect sense. The logic of its introduction, after all, was that Brazil faced a tsunami of hot money inflows as a result of the developed world’s aggressively loose monetary policies following the crisis of 2008-09. Those inflows made the currency stronger and eroded Brazil’s competitiveness. It needed a flood barrier. Now that the tide of those flows has turned, the obvious response is to take the barrier away.

If only things were that simple. 

By Jeong Young-Sik of Samsung Economic Research Institute

With the won/yen exchange rate plummeting from 1,432 to 1,107 per 100 yen since last October, Korea’s exports, which largely compete head-to-head with Japan, are feeling the pinch. The true impact of the weak yen, however, has yet to be felt, as the real economy lags behind major moves in foreign exchange rates but there is little doubt that the effect will grow. 

Thailand became the latest of several Asian countries to actively encourage the depreciation of its currency on Wednesday, continuing a trend that is likely to leave other regional economies with little choice but to follow.

Its central bank cut interest rates by 25 basis points from 2.75 per cent to 2.5 per cent a year, in an attempt to stem a rise in the baht, which hit a 16-year high last month. The Thai finance ministry is considering adding capital controls to the mix. 

Complaining about the effect of Japan’s monetary easing on the value of the yen is virtually de rigeur among the country’s trading partners. But Chart of the week shows that the most vocal critics of Japan are not necessarily those with the most to shout about. 

For the eighth time in 10 months, Peru’s central bank has raised deposit requirements on dollar-denominated accounts to stem the flow of hot money into its fast-growing economy and dampen currency appreciation. 

By Daniel Hui of JPMorgan

“It is said that enlightened governments… do not mobilise when there is no advantage, do not act when there is nothing to gain, do not fight when there is no danger.” – Sun Tzu

Markets have been captivated by the prospect and imagery of a “currency war” following Japan’s dramatic shift in monetary policy, and the recent 20 per cent depreciation of the yen. The narrative goes something like this: The sharp devaluation of the Japanese yen will be the casus belli which will provoke retaliatory devaluations by other Asian economies in self-defence.

All very colorful, dramatic and scary, to be sure. But to-date this is purely hypothetical, and likely to remain so. 

By Humayun Shahryar of Auvest Capital Management

While the world is focused on the ongoing currency war, not enough attention is being paid to the rise in global protectionism. The number of trade disputes at the World Trade Organization in 2012 is estimated to be more than in 2010 and 2011 combined, with the G20 countries accounting for 80 per cent of the protectionist measures. While the recent stock market rally, resolution of the US fiscal cliff and the perceived easing of the European crisis may have taken attention away from falling global demand and slowing economic growth, a sharp rise in protectionism is on the cards in the coming months as governments react to rising unemployment, growing income inequality and slowing economic growth. 

Global squabbles over exchange rates have emerged as a key concern for South Korea, as policy makers struggle to battle strong headwinds from Japan’s expansionary monetary policy.

A Bank of Korea report on Monday showed conflicts over currencies listed for the first time among the top five risks facing the country’s financial system, while concerns about China’s economic hard-landing and a delayed recovery in the US economy have subsided. 

What? Hulk no smash currency appreciation?

Just as other countries look like they are relaunching the global currency war – see Japan – it seems like Brazil may be tiring of its long-fought and ultimately unrewarding campaign.

After some inconsistent statements, Brazil’s finance minister, Guido Mantega, signalled on Friday that the government’s attention was swinging back to inflation. 

As Philipp Hildebrand explained in Tuesday’s FT, there is no such thing as a global currency war. But – as John Paul Rathbone outlined the next day – that hasn’t prevented the spread of currency fears across Latin America.

Policy makers have faced those fears in different ways. Munir Jalil and Jose Vicente Romero of Citi Research argue that Colombia has turned to some fancy accounting. 

How have emerging market currencies fared at the start of the year compared with 2012? Foreign currency investors say that the grip of so-called risk on, risk off trading has faded this year and that fundamental reasons for buying or selling a currency are dominating investment choice.

But the rise of currency wars is also playing a major role in determining which currencies rise or fall, as investors respond to rhetoric from central bankers and place bets on which countries are most likely to take action to weaken their currency this year. Chart of the week takes a closer look. 

Guido Mantega, Brazilian finance ministerTrying to understand what Guido Mantega is up to can be exhausting, especially when it comes to his favourite topic: currency wars.

The real weakened early on Wednesday after Brazil’s finance minister warned the government was ready to correct any excessive moves in the exchange rate, adding that a weaker currency makes domestic industry more competitive. 

Hot money is known in Latin America as “swallow” capital, like the migratory birds that arrive in the springtime, build a nest and raise their chicks, only to fly away elsewhere with all their brood.

But, rather than swallows, the dollars that have flooded into Costa Rica in recent months have been “real weapons of mass destruction” for the Central American nation’s economy, according to the president, Laura Chinchilla. 

Turkey cut interest rates and raised reserve requirements on Tuesday. It looks like a stylish balancing act: cut interest rates to make the lira less attractive, raise reserve requirements to compensate for the associated easing, and with luck you’ll get a weaker currency without stoking inflation. An exemplary piece of currency warfare.

If only things were that simple. 

Russia lambasted Japan and other countries this week for deliberately weakening their currencies to gain competitive advantage in global trade. Alexei Ulyukayev, the central bank’s first deputy chairman said: “We’re on a threshold of very serious, confrontational actions in the sphere that is known… as currency wars.”

So how come Russia itself is buying dollars to weaken its own currency?