The word ‘war’ seems sensationalist at the current stage of competitive devaluation between developed nations.
R ecall that the most recent significant currency war began after the 1929 Wall Street Crash, when France lost faith in British Sterling as a source of value and begun selling it heavily on the markets. France and the US began building hoards of gold, which inevitably contributed to the Sterling crises of 1931; whereby Britain took the pound off the gold standard.
A “beggar thy neighbor” policy became entrenched as nations competed to export unemployment, via currency devaluation. The fluctuations in exchange rates were harmful for international traders. Global trade declined sharply as a result and was also disrupted by retaliatory tariffs.
The rolling currency devaluations only ceased when France, Britain and U.S. created the Tripartite Agreement, which was informal and provisional, but nonetheless successfully stabilized exchange rates. World trade did not recover until much later.
There are two obvious differences today. First, it is hard to argue that there is a mainstream loss of faith in the current major currencies. Despite widespread use of unorthodox monetary policy tools, the U.S. dollar continues to act as a counter-cyclical currency and dollar weakness remains orderly. Meanwhile, the euro remains well within its historic trading range, despite the sovereign debt crisis of the past two years.
Second, the near total absence of protectionist measures to date, suggest that any deviations in trade volumes relate to final demand rather than trade policy.
The G20 finance ministers’ meeting later this week will no doubt keep the spotlight on ‘currency wars’. But until there is evidence that protectionism is restraining trade, it seems that a currency war between developed countries is an overstated risk.