Currency wars

Mexico is the latest country to complain of a strong exchange rate by selling US$600 billion worth of USD options, following loud protests from Brazil. Amongst the developed countries, the EU, Japan, South Korea and Switzerland have all either tried to talk their currencies down or intervened in the FX market to try to weaken their currencies. The reason for such sentiments is plain - everyone wants to export their way out of recession and into economic growth, and with China's exchange rate pegged to the USD, the fear of losing even more market share to China is driving many countries to try to devalue their currencies.

Since balance of payments must always balance on a global basis, it is impossible for everyone to achieve a balance of trade surplus without someone willing to run a deficit. That someone used to be the United States, but since the start of the global financial crisis, Americans have either been unable or unwilling to continue to play this role.

We live in a strange world indeed. In the papers, we read about an economic recovery, but then we also notice that countries are all complaining about strong currencies. 1 side of this story is not true. Which side would you believe?

Looking at things as they are now, if the global economic situation deteriorates further, currency wars could escalated into full-fledged trade wars between nations. One possible trigger could be the US-China row over the RMB exchange rate issue. That may trigger the start of a new wave of protectionism. Sounds a little like what happened in the 1930s, doesn't it?