Subject: War of currency, who is the winner?

During the last week, U.S. dollar kept its way of weakening against major currencies of the world. The exchange rate of Euro has achieved its 8 months’ record high against US dollar, the Australia dollar has reached its 27 years’ historical high and the Japanese yen has got its 15 years’ historical high ever since the “Plaza Accord” in the late 1980s. What’s more, only in September, the Chinese Yuan has been appreciating by 2% against US dollar, and this number is still growing. It is expected that the policy of weakening dollar may trigger a currency war among the major economic entities all around the world. Under this circumstance, lots of central banks have taken measures to prevent an over-appreciation of its own currency. Japan has lowered its inter-bank overnight call rate to nearly zero. And the government also approved a stimulus package of 5.05 trillion yen. Emerging market and export oriented countries like Brazil raised the taxes on fixed income securities from 2% to 4%. South Korea is now buying U.S. dollars to prevent its won going up too quickly.

As far as we are concerned, there are mainly two reasons for the current war of currency all over the world. The primary reason is that the United States hasn’t demonstrated a very strong potential in its growth. The economic performance is way below its expectation. To stimulate the economy, Federal Reserve has released several monetary plans which are referred as “quantitative easing”. Basically, the Fed is pouring money into industries and thus lowering interest rate and exchange rate. According to statistics, federal fiscal budget deficit is estimated to be higher than $1.3 trillion in 2010. The huge federal debt had put lots of stress on the federal government. The government is probably planning to lower its treasury deficit by making U.S. dollar depreciate, since bill of cutting taxes proposed by former president George W. Bush has not expired yet. And the unemployment rate of US in 2011 will remain at 9.6% according to IMF’s latest forecast. Under such circumstances, the US dollar is believed to be overpriced and is likely to depreciate even further. Another important reason for the US to bring up the exchange rate issue at this point of time is that the midterm election is approaching. The current government is doing whatever they can to achieve a higher growth rate. A loose monetary policy has already been taken; and now by focusing on the exchange rate of other countries, especially China, the government can distract the voters from the sluggish economy today. The aggressive depreciation of US dollar may be helpful to lower the huge amount of US deficit at this time, but the following trade frictions and various trade protection measures by other countries against the US will eventually hurt American imports and exports badly.

While the U.S. dollar was weakening, the Chinese yuan is appreciating slowly but steadily. Nonetheless, Chinese government is under fierce criticism on so called “intentionally manipulating exchange rate”. China has been practicing a fixed exchange rate policy for a while. This summer, it declared to adopt a floating exchange rate. Since then, the Chinese yuan has gone up slowly by 2% against U.S dollar. Export has long been an indispensible part of China’s GDP and a huge appreciation in RMB will have catastrophic influence on the export enterprise, and later on China’s real economy. It is undeniable that China should open up its exchange rate and globalize RMB, but this process should be accomplished step by step. It is a tough time for all the economic entities and only when we unite, instead of conflicting can we find a solution. This moment is a perfect timing for a change in the international monetary system. It can also be the beginning of a more mutually beneficial global economic environment.