Subscribe free to our newsletters via your
. Earth Science News .

Walker's World: New currency wars
by Martin Walker
Paris (UPI) Feb 4, 2013

disclaimer: image is for illustration purposes only

Ten years ago this week, one British pound bought 1.6 euros. Today it buys 1.15 euros, which means British exports are dramatically cheaper and Britain's imports from Europe (and British vacations in Europe) are very much more expensive.

There could hardly be better news for Britain's beleaguered exporters and the shift in exchange rates helps explain why the country's car manufacturing broke all-time export records in 2012, with more than 1 million cars sent overseas out of the 1.5 million made.

And with some $10 billion of new investments in the pipeline from Nissan, BMW and Jaguar-Land Rover, production should top 2 million in 2016. It is noteworthy that this performance took place against a dramatic fall in car sales in Europe, with last month saw 15 percent drop in French registrations to their lowest January level since 1997. Italian sales dropped 17.6 percent.

By contrast with Britain, auto manufacturers in the United States are nervous at the effect of lower prices for Japanese imports after the sharp fall in the value of the Japanese yen. Last October, just four months ago, one dollar would buy just less than 78 yen. Last week, a dollar bought 93 yen, close to a 20 percent drop, and the yen has fallen even further against the euro.

Welcome to the new era of currency wars. Three years ago, Brazil's finance minister warned that this would be coming as he saw Brazil's manufacturing industry shrink under the impact of Brazil's soaring real and the flood of cheaper imports from abroad. China's efforts to hold down the value of its own currency have triggered repeated fits of outrage in Congress.

There are three bizarre features of the global currency markets. The first is that they are huge, regularly trading in a range of $4 trillion-$5 trillion a day, which means that ever year they are trading more than $1 quadrillion, which is about 13 times the value of all the economic activity on planet Earth.

The second curiosity is that currency values are sometimes far adrift of economic fundamentals. There are reasons for the current weakness of the British pound and of the Japanese yen but they don't justify the massive swings in currency value.

It isn't easy to explain, on the basis of comparative output figures, why the euro should have been worth just more than $0.84 in 2000 and then became worth $1.60 in 2008. The value of the two economies didn't diverge to anything like that extent; Europe didn't become twice as prosperous nor did the United States shrink by half. (The dollar is currently trading at $1.36 to the euro.)

The head of Germany's Bundesbank, Jens Weidmann, sounded a warning last month on the implications of latest currency gyrations, although he didn't use the incendiary term "currency wars." Instead he spoke of "competitive devaluations."

"Already alarming violations can be observed, for example in Hungary or Japan, where the new government is interfering massively in the business of the central bank with pressure for a more aggressive monetary policy and threatening an end to central bank autonomy. A consequence, whether intentional or unintentional, could moreover be an increased politicization of exchange rates," Weidmann, who also sits on the ECB's Governing Council, said in a speech to the German stock exchange. "So far the international currency system has come through the crisis without a devaluation competition, and I hope very much that remains the case."

Weidmann's fear is that competitive devaluations are a form of protectionism in disguise, as governments seek to boost their own exports by making them cheaper.

This brings us to the third oddity of exchange rates: that such efforts can only last if other governments allow competitors to get away with it. Once they start taking action (whether through lowering interest rates or changing tax codes or fiscal policies) to devalue their own currencies they join a race to the bottom which nobody can win. The effect could be like the protectionist wars of the 1930s.

The point is that currency markets overreact. The prospect of the United States falling off the fiscal cliff last month, or facing a further political crisis over the deficit this spring, means the markets have been worried about the value of the dollar. But the decision of Shinzo Abe's new government in Japan to lower the exchange rate by targeting higher inflation and more borrowing has hit the markets even more.

There is no such logic behind the shifts in Europe between the pound and the euro. The latest British manufacturing data and the Purchasing Managers Index are both better than their European counterparts. The euro crisis isn't over and a new banking scandal in Italy and the latest uproar over Spanish politicians and secret funds are destabilizing the politics of the eurozone.

What made the markets sell pounds and buy euros was that Britain's relatively decent data were expected, while minor blips in the eurozone PMI and its unemployment rate came as a surprise.

For British exporters this was helpful. For British voters however, whose pounds now buy less while the government admits that its latest welfare cuts will push 200,000 children below the official poverty line, the prospects are grim. The currency markets giveth and they also take away.


Related Links
Global Trade News

Comment on this article via your Facebook, Yahoo, AOL, Hotmail login.

Share this article via these popular social media networks DiggDigg RedditReddit GoogleGoogle

Memory Foam Mattress Review
Newsletters :: SpaceDaily :: SpaceWar :: TerraDaily :: Energy Daily
XML Feeds :: Space News :: Earth News :: War News :: Solar Energy News

Japan bookings to China still falling amid island row
Tokyo (AFP) Feb 4, 2013
Bookings on Japanese package tours to China for February and March are down around 80 percent, tourism industry data showed Monday, as a months-old territorial row dragged on relations. Tours to China, booked through Japan's seven biggest travel agencies, fell by 80.3 percent year-on-year for February and by 77.2 percent for March, the Japan Association of Travel Agents said. Tokyo and B ... read more

NGO ends Mozambique flood aid over graft: report

Fireworks truck blast blamed for China bridge collapse

26 dead as China bridge collapses: media

Australian summer lurches from fire to floods

Novel materials shake ship scum

Penn Research Shows Mechanism Behind Wear at the Atomic Scale

NTU research embraces laser and sparks cool affair

Bioinspired fibers change color when stretched

Young dolphin lures pod to safety in Australia

UN delivers chemicals to treat water for 10 mn Syrians

Underwater CO2 shows potential as barrier to Asian carp

Australia failing UNESCO demands on Barrier Reef: WWF

NSF-funded Team Samples Antarctic Lake Beneath the Ice Sheet

Norway's ruling party may back Arctic islands oil drive

Greenland ice cores provide vision of the future

Deep ice shows Greenland was warmer; offers clued to future warming impacts

India's changing appetite throws up meaty issues

Hong Kong to crack down on baby formula trade

Hong Kongers turn to Obama over milk shortage fears

Global research team decodes genome sequence of 90 chickpea lines

Early warning saved the day for flood-prone Mozambique

Crocodiles a risk as Australian floodwaters recede

Powerful 6.9 earthquake shakes northern Japan

Jordan flood kills elderly man

Sudan president in Eritrea after Asmara mutiny: reports

Central African rebels warn president over peace deal

DR Congo peace deal signing cancelled: UN

Troops and drones to bolster new UN Congo peace bid

Professional training 'in the wild' overrides laboratory decision preferences

Monkeys move together like humans do

Bindi Irwin slams Hillary Clinton editors over essay

A relative from the Tianyuan Cave

The content herein, unless otherwise known to be public domain, are Copyright 1995-2014 - Space Media Network. AFP, UPI and IANS news wire stories are copyright Agence France-Presse, United Press International and Indo-Asia News Service. ESA Portal Reports are copyright European Space Agency. All NASA sourced material is public domain. Additional copyrights may apply in whole or part to other bona fide parties. Advertising does not imply endorsement,agreement or approval of any opinions, statements or information provided by Space Media Network on any Web page published or hosted by Space Media Network. Privacy Statement