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Currency wars on hold for now

Over the past few weeks we've heard lots of discussion about so-called "currency wars". The US, in particular, has ratched up its rhetoric of complaint against the Chinese for not allowing the value of its currency, the yuan, to appreciate. Japan, Brazil and South Korea have also devalued their currencies in recent weeks. 

It has often appeared that the US is the only country that feels strongly about China's currency policy, and so the US has sought to try to gain international support for its position. But as the New York Times reports, the US failed to obtain such support at the International Monetary Fund's annual meetings on the weekend. The meetings ended "with a tepid statement that made only fleeting and indirect references to the simmering currency tensions." Following the meeting, the US vowed to increase the pressure on China, according to the Wall Street Journal.

Other countries are concerned about China's approach. But they are just as opposed to seeing the US dollar falling. And they see that the Federal Reserve's easy monetary policies are pushing the US currency down. At the same time, they note that China has indeed allowed its currency to rise, albeit gradually. 

Moreover, the major developed countries recognize that they cannot simply slap down emerging economies like China; they recognize that these economies must have their say. This is a further sign that the US's period of unipolar dominance is eroding.

The fact is that most countries "manipulate" their currencies in one way or another. Even though China's intervention, by means of purchasing dollars, is one of the heaviest, the country should not be singled out for blame.  

If they get out of hand, competitive devaluations, like trade wars, are potentially very destructive. These extreme moves are typically born out of desperation in a low-growth or negative-growth environment. The key is to focus on the positive - on growth. That is the only way to relieve these pressures. 

Clive Crook argues in today's Financial Times that now is the "time to get tough with China". That's misguided, and derives from a pessimistic view of the possibility of change. Crook writes: "If the equilibrium rate of unemployment has risen, scope for remedial monetary and fiscal policy is diminished. Which leaves getting tough with China." 

I've written before (see here and here), the US would be better served by focusing on getting its own economic house in order before resorting to blaming others. A lower yuan will not address the US's issues of competitiveness. That will require a harder look at the economic fundamentals that drive growth.

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