Currency wars are looming as nations try to jump start their economies during a global downturn. The U.S. has been increasing pressure on China to end the artificial suppression of the yuan’s value. Many other countries, including Japan, Brazil, Switzerland and Israel are trying to drive down the value of their currencies to improve exports. Concerned policymakers call currency wars a risk to global economic recovery and are calling for a spirit of international cooperation.
Currency wars: nobody wins
The prospect of a full-scale currency war seemed close Thursday when the dollar fell to an eight-month low against the euro, and the U.S. increased pressure on China to let its yuan rise. The BBC reports that although countries manipulate currencies for economic advantage, the cumulative effect undermines the global economy. Unilateral action by one central bank ignites conflict in other parts of the world. For example, last month Japan took steps to weaken the yen to make Japanese goods cheaper in the U.S. This led to a stronger dollar, which hurts a recovery based on rising exports and magnified the U.S. currency dispute with China.
U.S. dispute with China drags in Europe
The Associated Press reports that the House has approved legislation calling for economic sanctions on China and other countries manipulating their currencies. Hoping to create jobs, U.S. manufacturers want to make the dollar fall up to 40 percent against China’s yuan. Investors are expecting the Federal Reserve to try weakening the dollar by printing billions of dollars in new money. Because every country is connected in the global economy, that expectation has caused the Euro to rise, which is bound to anger European governments.
Why manipulating currencies is the wrong idea
In hopes of diffusing the currency wars, the International Monetary Fund is meeting in Washington this weekend. However, David Sterman at Investing Answers said the real solution is for the world to change its consumption habits. For the global economy to function, Sterman writes that countries such as China and Japan should increase domestic consumption to reduce trade surpluses. Countries like the U.S. should export more to reduce trade deficits. President Obama wants to double U.S. exports in five years. To do that, he needs China, Japan and the rest of the world to cooperate.