Thursday, October 21, 2010
Some Cry Foul Over U.S. Dollar's Devaluation
An article in the New York Times questioned whether a currency war has started over the U.S. dollar's continuing devaluation, with a number of people arguing that "Washington is deliberately devaluing the dollar at others' expense." The dollar's value has decreased by about 10% since June against major currencies and the decline is expected to continue as the Federal Reserve "is expected to inject vast sums of money into the economy in another attempt to spur growth" through quantitative easing measures, examples of which can be found here. Although such policies may boost the U.S. economic outlook, other countries fear their effects.
Largely because it is linked to the dollar, the Chinese renminbi has also declined (one reason the U.S. trade deficit has increased despite the dollar's devaluation), forcing developing countries to devalue their exchange rates "to bolster their export-driven economies." A weaker renminbi threatens to cut exports in these fast-growing developing countries, slowing that growth.
Another fear among other countries is that "investors will flee America's low interest rates and declining dollar and instead pour capital into their markets, overheating their economies and...[creating] bubbles in stocks and housing that burst with...devastating effects." There are already signs of this speculation, as American investment in foreign stocks has seen a large jump. Both Brazil and South Korea have taken action to limit speculative foreign investment in their economies.
Some maintain that the dollar's decline is a natural reaction to the economic recession and that it will recover soon; others "fear that Washington may be stoking dangerous inflationary pressures that will have repercussions around the world."
A currency war? It depends on who you ask.