Regulate the Carry Trade

PRINCETON – During the early years of the global financial crisis, exchange rates were the least interesting part of the macroeconomic debate. A French proposal in 2011 for a sweeping reform of the international monetary regime went nowhere. Today, the subject has become the focus of intense anxiety – and with good reason.

Currency wars are a reminder of the fragility of the process of globalization. As one part of that process begins to appear unacceptably painful, demand for political intervention rises, and the entire system risks beginning to unravel.

The expectation that interest rates in the United States will rise is driving up the value of the dollar, even as monetary easing in Japan and Europe is pushing down the yen and the euro. Over the last year, the euro has lost more than a fifth of its value relative to the dollar, and there is no sign that the trend will reverse anytime soon.

The euro’s depreciation has been greeted with delight by Europe’s business leaders. But in the US, where the dollar’s gains are threatening to choke off economic recovery, officials at the Federal Reserve are expressing signs of concern.