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.
Only the eurozone seems to be bucking the trend, as the European Central Bank has allowed a rise in the short-term interest rate. But even the ECB cannot be indifferent to the risks of appreciation, because a strong euro may seriously complicate economic adjustment in countries like Spain, Portugal, Greece, and Ireland.