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The following article was published in our article directory on October 21, 2010.
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Currency War There are No Winners

Article Category: Business

Author Name: xia zihui

Into the second half of 2010, "currency war" has become a major threat to world economic recovery, one of the risks. This "currency war" the main elements are: the United States led the developed countries in the case of zero interest rate policy to further strengthen the quantitative easing policy, and emerging market countries provoked monetary policy in the conflict.

Extension of the subprime crisis

Into 2010, the United States, Europe
Union and Japan, some developed countries to maintain low interest rates by race and implementation of quantitative easing policy to guide the currency devaluation, a large number of international hot money flows to higher-yielding emerging market countries, contributed to the appreciation of its currency risk. Faced with this risk, Brazil, Singapore, South Korea, Malaysia, Indonesia, Thailand and some other emerging market countries have taken measures, including two forms: one is through the foreign exchange market intervention to prevent currency appreciation; the second is to enhance the inflow of hot money regulatory or take measures to prevent hot money inflows. In this contest, the developed countries in emerging market countries accused of manipulating their currencies and emerging market countries countered with the developed countries led by the U.S. loose monetary policy induced devaluation of the currency.

For China, the second half of 2010, the U.S. government has increased efforts to force the RMB appreciation, intensifying a dispute between the United States currency. The one hand, the U.S. government is to divert attention, trying to provoke a "currency war" the responsibility onto the Chinese, the other is in response to congressional mid-term elections, the reasons for high unemployment, the U.S. imposed on China's exchange rate policy. U.S. government pressure on the specific strategic point of view, one of the means of the exchange rate with the U.S. Congress bill yield to the pressure to blackmail China; means of the second attempt to join forces with other developed and emerging market countries and the Group of Twenty platform with and the International Monetary Fund (IMF) and other international organizations to force the RMB appreciation.

Part of the US-led developed countries to implement the policy because of the devaluation is: on the one hand the economic recovery process in these countries is slow, the second bottom significantly increased risk; the other hand, the huge scale of the financial liabilities and the zero interest rate policy to enable these countries further loss of policy instruments to stimulate their economies. In this context, through the implementation of the currency devaluation, relying on export-led economic growth in their countries has become final "straw." From the above point of view, the U.S. subprime mortgage crisis is caused by "currency war" one of the important reasons that caused the subprime mortgage crisis and global economic downturn, while traditional fiscal and financial instruments have been unable to return to long-term economic growth in developed countries track As a result, part of the developed countries led by the U.S. to take selfish policy of currency depreciation. But in fact, in today's world, "You have me, I have you," the era of economic globalization, the practice of developed countries only dog in the manger.

Negative interest rate is the fuse

September 2010, Federal Reserve Chairman Ben Bernanke said that the need for further purchase of government bonds and strengthen the quantitative easing policy, this statement means that the U.S. may be through a large number of printing money to stimulate economic growth. This "verbal intervention" to accelerate the depreciation of the dollar process. The reason for the Fed in the zero interest rate policy, based on the further implementation of the quantitative easing policy, because the latter can more effectively guide the dollar.

Typically, the zero interest rate policy and quantitative easing policies may help reduce the role of currencies, but the impact of exchange rate path and the two had different effects. Zero interest rate policy mainly through the carry trade, high interest rates to guide the flow of capital within the country, in order to achieve the goal of reducing the currency exchange rate. The quantitative easing policy is to increase the money supply by way of increased inflation expectations, so as to achieve the purpose of the devaluation. As developed countries have also taken a zero interest rate policy, zero interest rate policy to guide the role of the dollar is limited, in this situation, only the negative interest rates to effectively guide the devaluation of the currency, while the United States to implement the policy of quantitative easing, two-pronged approach to further guide the dollar.

Bernanke said the U.S. should remain at 2% inflation target, and the corresponding targets under the quantitative easing policy. This policy choice means that the nominal interest rate close to zero, the United States there will be -2% real interest rate. It is subject to the expected impact of quantitative easing the process of accelerated depreciation of the dollar.

Quantitative easing policy is the United States caused by the reaction of the following two aspects: on the one hand, there are indications that part of Japan and other developed countries will adopt the same policy to guide the currency devaluation; the other hand, some emerging market countries are trying to take various measures to prevent currency appreciation . Over a chain reaction that induced the United States dollar is the cause quantitative easing "currency war" fuse.

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