Currency War: Fighting To Be Weaker

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"We're in the midst of an international currency war," Brazil's finance minister said this week.

The world's biggest economies are combatants, and they all want the same thing: a weaker currency.

Japan, Taiwan and South Korea have publicly intervened in open markets, to make their currencies weaker. China has not been so public, but it's pretty clear that the country is keeping its currency artificially weak.

In the U.S., the Fed has kept short-term interest rates superlow and has printed more than $1 trillion to buy mortgage bonds — moves whose main purpose is to stimulate domestic spending, but which also tend to weaken the dollar's value against other currencies.

On top of that, Congress has been pushing China to allow its currency, the yuan, to rise against the dollar. In other words, Congress wants the dollar to be weaker against the yuan.

A weaker currency is good for exporters, because it makes goods cheaper in other countries. And, with demand weakened by the struggling economy, everybody is looking to exports for growth. A weaker currency also makes imports more expensive — in other words, it acts as a sort of silent tariff.

In a sense, then, the currency war is a wonky form of protectionism — slightly less obvious than slapping tariffs on imports, but with similar results.



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