MANIPULATING one’s currency to gain competitive advantage against a trading rival is to some governments the fastest route to solving the problem of falling exports. Politically, it’s much easier for a ruling party to remind the central bank of its new responsibility to also concern itself with economic growth of the country than to undertake some term-limiting reforms.
Not too many countries will openly admit to fiddling with their exchange rates, but there is to varying degrees a currency war on in almost every corner of the world.
Few central banks can claim total independence in a world where everyone is searching for growth and more importantly job-generating growth. Yesterday’s Financial Times front page carried an article on Germany’s Bundesbank president warning against the erosion of this independence, claiming that it could unleash a round of competitive exchange rate devaluations.
We risk a world where exchange rates are no longer determined by market forces, but by politics. We may in fact already be in the grips of such a world.
On top of anyone’s mind right now when it comes to central bank independence and currency manipulation is Japan, with its new prime minister’s threat to rein in the bank if it did not follow a course of looser monetary policy.
Earlier this week, the central bank of the world’s third-biggest economy raised its inflation to 2% and said it would pursue aggressive monetary easing. As the country is in deflation, reaching the new target is miles away.
The policy changes are partly aimed at weakening the yen, which has already fallen 13% against the dollar over the past 12 months, even worse than the rand.
As an export-based economy losing its edge to emerging Asia, which includes not only China but countries such as Cambodia, Japanese policy is for a weak currency.
It’s the last place to go for a country that has seen its leadership in technology struggle against countries such as South Korea. The story of Japan’s decline is best captured if you were to compare the valuations of Sony and Samsung. The South Korean firm has a market capitalisation north of $205bn, while Sony is worth about $13bn.
It’s not only Japan that has had to fiddle with its exchange rate.
Whether intentional or not, US monetary policy since its recession could be interpreted as dollar debasement. Quantitative easing has kept the dollar relatively weak. (While the US economy is not an export-based one like Japan’s, a strong export component is nonetheless helpful in trying to boost the giant’s fortunes.)
Brazil has been the most vocal critic of the US Federal Reserve’s stimulus packages, which has led to the real’s appreciation as investors seeking higher yielding assets. It’s been an appreciation most unwelcome for an economy that has seen growth rates fall over the past year because of the global slowdown.
In response to the appreciating currency, Brazil’s central bank has aggressively cut its interest rates to offset any appreciation.
The Swiss central bank has also looked to weaken its currency as investors consider the Swiss franc as a safe haven in light of the struggles of the eurozone and its 14-year-old currency. The currency was eventually pegged to the euro in September 2011.
While economic policy seems to be playing a much bigger role in the value of money, the South African Reserve Bank — even if it had the appetite — does not have the artillery to affect the value of the rand, the world’s most volatile currency. The nature of the rand is that we generally take whatever the price is of emerging market risk combined with our own domestic problems.
At R8.85/$ in late afternoon trade yesterday, South African exporters are set for some short-term gain. But a weak currency stokes inflation in the medium to longer term.
With the global players affecting their currencies — intentionally or not — the rand, like other small-country currencies, could find itself in volatile waters for some time.
What do you do in a war with no guns? The best defence is not to be seen, which may prove difficult for the rand, one of the world’s most liquid currencies.
SHAREHOLDERS in the world’s most valuable company, Apple, may undergo what they haven’t in 10 years.
Eighteen months after taking over as CEO from Steve Jobs, Tim Cook faces rising costs, Samsung rivalry and slowing growth in smartphones, which is threatening profits, according to Bloomberg.
Since its September peak, shares have fallen close to 30%.