Will We Have A Currency War?

by J. Archer on October 29, 2010

Well… Maybe if you asked me prior to the G20 meeting this past week I would have been in the camp that believed we would. But, now I am not so sure.

Today the G20 agreed not to devalue currencies to boost exports… This threw a wet blanket on the notion of currency war. The G20 members are for “letting the markets set foreign exchange values”. The US (and Japan) was probably not listening though.

For those of you following the story… “The Currency War” has been the term used to describe the willingness of the major countries to devalue their currencies, or more accurately; race to devalue their currencies so as to stem poor economic numbers. Basically, a weak currency makes a countries exports attractive, however, a weak currency robs purchasing power from the people of the country doing the weakening.

We have seen this here in the States plenty. We have Geithner publicly declaring that the US is in favor of a strong dollar, and then he and the Fed work together to do everything they can to devalue it.

To make matters worse, Geithner leads a charge to label China a currency manipulator. Why? China is one of the largest creditors to the US. They are in fact purchasing our debt and financing our bankrupt government and it’s services. The reason Geithner has gone after China in this fashion is to put pressure on the Chinese to allow their currency, the Renminbi, to appreciate against the dollar. The claim is that the Chinese have an unfair advantage in trade.

The Renminbi has been pegged to the US dollar for years. The Chinese have allowed the peg to be loosened from time to time, yet they still control the way it fluctuates as oppose to having it freely float in the marketplace. So, yes… they do manipulate its value.

But, what is the US doing to the dollar? Is the US not manipulating its currency? Of course it is! And so, how can the US label China a currency manipulator when all it has done is devalue the dollar in the interest of cheapening its debt to the world. After all if the US can succeed in its desire to devalue the dollar it pay its debts with cheaper dollars.

With US Treasury Secretary Tim Geithner banging on China, you just have to wonder when China retaliates. The Chinese have allowed their currency to gain 2% or more against the dollar in past two months.

I feel that the Chinese will bark back at some point. Not that they would stop allowing the renminbi to appreciate, yet they could slow it down again. How will the Chinese react to the tariffs bill that the House passed a couple of weeks ago? The Senate will not vote on the bill until after the election. But, if the Senate votes in favor of adding tariffs on Chinese exports, the Chinese may react to this US protectionism poorly.

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