The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.
“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.
The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.
The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room. The risk is as each country tries to boost exports, it hurts the competitiveness of other economies and provokes retaliation.
Yesterday “will go down as the first day European policy makers fired a shot in the 2013 currency war,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London.
The skirmish may lead to a clash of G-20 finance ministers and central banks when they meet next month in Moscow, three months after reiterating their 2009 pledge to “refrain from competitive devaluation of currencies.”
While emerging markets have repeatedly complained about strong currencies as a result of easy monetary policies in the west, the engagement of richer nations is adding a new dimension to what Brazilian Finance Minister Guido Mantega first dubbed a currency war in 2010.
After Switzerland blocked the franc’s appreciation against the euro since September 2011, Japan has reignited the latest round of rhetoric as newly elected Prime Minister Shinzo Abe campaigns to spur growth via a more aggressive central bank. The yen has slid 11% against the dollar since December and this week touched its lowest level in two years.
Now other policy makers are speaking out. Juncker, who leads the group of euro-area finance ministers, said yesterday that the euro’s 7% gain against the dollar in the past six months poses a fresh threat to the European economy just as it shows signs of escaping its three-year debt crisis.
While the euro fell, the power of his words may be limited by signals from the European Central Bank that it isn’t prepared to favor a weaker currency. ECB President Mario Draghi last week said he has no goal for the exchange rate, although he noted the euro was trading at its long-run average.
The euro exchange rate is “not a major concern,” ECB council member Ewald Nowotny told reporters in Vienna today.
“For us, the exchange rate of the euro is one variable to be factored in, but isn’t a goal in itself,” ECB Executive Board member Peter Praet told La Libre Belgique newspaper in an interview published today.
Still, economists at Goldman Sachs Group Inc. and Citigroup Inc. said in reports today that a further strengthening of the euro could eventually help trigger an interest-rate cut from the ECB.
In Norway, Finance Minister Sigbjoern Johnsen said in an interview that a strong krone challenges the economy and that the government must ease pressure on the Norges Bank to avoid krone strengthening by conducting a “tight” fiscal policy. Norges Bank Deputy Governor Jan F. Qvigstad said yesterday that if the krone remains strong until policy makers meet in March, “that of course has an obvious effect on the interest rate.”
That pushed the currency, which has emerged as a haven from the European crisis, to its lowest level in more than two months versus the euro.
Meantime, Riksbank Deputy Governor Lars E. O. Svensson said today that a strong Swedish krona would be “yet another reason” to lower borrowing costs. He last month argued for a deeper cut than the 0.25 percentage point move to 1% that colleagues supported.
“It’s obvious that the economy would manage better in this very difficult, weak economy with a lower rate and a weaker krona,” Svensson said in Stockholm.
Elsewhere, Bank of Korea Governor Kim Choong Soo said Jan. 14 that a steep drop in the yen could provoke an “active response to minimize any negative impacts on exports and investor confidence.” Vice Finance Minister Shin Je Yoon said today that South Korea wants the G-20 talks in Moscow to focus on adverse effects of monetary easing in the U.S., Europe and Japan.
If Japan continues to pursue a softer currency, reciprocal devaluations would hurt the global economy, Russia’s Ulyukayev said today. That echoes recent concern from other international policy chiefs.
Federal Reserve Bank of St. Louis President James Bullard said Jan. 10 that he’s “a little disturbed” by Japan’s stance and the risk of “beggar-thy-neighbor” policies.
Reserve Bank of Australia Governor Glenn Stevens said Dec. 12 that there is a “degree of disquiet in the global policy- making community,” while Bank of England Governor Mervyn King said Dec. 10 that he worried “we’ll see the growth of actively managed exchange rates.”