Analysis: Turning point in the currency war

Wed Mar 21, 2012 3:01am EDT
 
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By Mike Dolan

LONDON (Reuters) - A counteroffensive of sorts may be underway this year in what has seemed like a one-sided "global currency war" as developing economies slow, western money-printing pauses and the heat comes out of pumped-up emerging market currencies.

The three-year-old "war", as Brazil dubs the devaluationist policies of developed nations seeking relief from home-grown credit crunches, may well just come full circle and burn itself out as a result.

But the reverse course of emerging currency depreciation carries its own significant risks, from skewing investment decisions to aggravating trade diplomacy.

What's more, it's Japan's success this year in finally weakening its supercharged yen, by fresh rounds of money-printing from its central bank, which may prove pivotal by disturbing the delicate balance in Asia.

Some economists warn the yen's more than 10 percent retreat since January is already forcing China's hand on its own controversial policy of yuan capping in a way that could cause consternation in Washington in an election year.

Far from seeing a sharply rising yuan emerge from China's policy of greater exchange rate flexibility - core U.S. and multilateral demands - the yuan has actually weakened this year as China's economy and inflation rates slow, its trade account worsens and fears of a "hard landing" there persist.

Even though the tightly-controlled yuan has gained more than 10 percent against world currencies over the past five years, it's one of the few major emerging market currencies to remain lower against the U.S. dollar so far in 2012. Bouncing back smartly from a dire 2011, Russia's rouble, India's rupee, Mexico's peso and South Africa's rand are all up 5-10 percent.

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A man is reflected on an electronic board displaying exchange rates in a business district in Tokyo March 15, 2012. REUTERS/Toru Hanai