The world does not need a currency war
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“It’s our currency, but it’s your problem,” John Connally, Richard Nixon’s treasury secretary, told the world in 1971. Four decades later, the dollar’s weakness threatens to incite a full-blown currency war that could distract policymakers from their key task of mending the post-pandemic global economy.
The US currency has been on a downward trend for several months. The Federal Reserve’s recent shift to an even more dovish stance — saying that it will allow inflation and the labour market to run hotter for longer than previously — looks set to exacerbate the dollar’s decline.
“Had the changes to monetary policy goals and strategy we made in the new statement been in place several years ago, it is likely that accommodation would have been withdrawn later, and the gains would have been greater,” Fed governor Lael Brainard said in a speech this week. In other words, the US central bank will delay tapping the interest-rate brake for longer in future.
The strategy adaptation, announced last week by Fed chair Jerome Powell after a yearlong review, will embolden traders who were already speculating on dollar weakness and have raised their bets on the euro to record levels.
The euro’s steady ascent against the currencies of its main trading partners is clearly starting to make the European Central Bank a bit nervous, prompting its chief economist, Philip Lane, to make a rare and limited verbal intervention earlier this week.
“The euro-dollar rate does matter,” Lane said on Tuesday. “If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting.”
Lane’s gentle attempt to jawbone the euro lower suggests that the ECB is uncomfortable with a value for the common currency of more than $1.20, the level it briefly breached for the first time in two years before his comments drove it down — and bang in line with its average value since it was introduced in 1999.
The ECB’s pain is easy to name. The stronger the euro, the greater the disinflationary effects as foreign goods cost less. Imported deflation, often from China, has been a persistent factor in keeping inflation subdued in many developed economies.
The guardian of monetary stability in the euro bloc has very few options left to meet its inflation target, as it already has deeply negative interest rates and a vast ...
The US currency has been on a downward trend for several months. The Federal Reserve’s recent shift to an even more dovish stance — saying that it will allow inflation and the labour market to run hotter for longer than previously — looks set to exacerbate the dollar’s decline.
“Had the changes to monetary policy goals and strategy we made in the new statement been in place several years ago, it is likely that accommodation would have been withdrawn later, and the gains would have been greater,” Fed governor Lael Brainard said in a speech this week. In other words, the US central bank will delay tapping the interest-rate brake for longer in future.
The strategy adaptation, announced last week by Fed chair Jerome Powell after a yearlong review, will embolden traders who were already speculating on dollar weakness and have raised their bets on the euro to record levels.
The euro’s steady ascent against the currencies of its main trading partners is clearly starting to make the European Central Bank a bit nervous, prompting its chief economist, Philip Lane, to make a rare and limited verbal intervention earlier this week.
“The euro-dollar rate does matter,” Lane said on Tuesday. “If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting.”
Lane’s gentle attempt to jawbone the euro lower suggests that the ECB is uncomfortable with a value for the common currency of more than $1.20, the level it briefly breached for the first time in two years before his comments drove it down — and bang in line with its average value since it was introduced in 1999.
The ECB’s pain is easy to name. The stronger the euro, the greater the disinflationary effects as foreign goods cost less. Imported deflation, often from China, has been a persistent factor in keeping inflation subdued in many developed economies.
The guardian of monetary stability in the euro bloc has very few options left to meet its inflation target, as it already has deeply negative interest rates and a vast ...