Currency Chaos

The controversy over China’s exchange-rate policy has morphed into a global macroeconomic clash between advanced and emerging countries, owing to a lack of global coordination. This suggests that the solution to currency wars is not to declare a truce, but to recognize the nature of the issue and overcome the problems that block an adjustment that is in everyone's interest.

BRUSSELS – Guido Mantega, Brazil’s finance minister, aptly captured the current monetary Zeitgeist when he spoke of a looming “currency war.” What had seemed a bilateral dispute between the United States and China over the renminbi’s exchange rate has mutated into a general controversy over capital flows and currencies.

Today, every country seems to want to depreciate its currency. Japan has resumed foreign-exchange intervention, and the US Federal Reserve and the Bank of England are preparing another large-scale purchase of government bonds – a measure called “quantitative easing,” which lowers long-term interest rates and indirectly weakens the currency.

China is fiercely resisting US and European pressure to accelerate the snail-paced appreciation of the renminbi against the dollar. Emerging-market countries are turning to an array of techniques to discourage capital inflows or sterilize their effect on the exchange rate.

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