A Phony War?

Are currencies in a phony war?

At the onset of World War 2, the Germans and French faced off from October of 1939 through April of 1940 with only a few minor skirmishes being fought. It seems that a phony war is now being waged among international currencies. Brazil’s finance minister used that phrase to describe how governments around the world are trying to push their currencies lower in order to boost the competitiveness of their exports.

After all, China has been suppressing its currency’s rise by amassing huge foreign exchange reserves; The Japanese and Swiss are actively intervening to lower the Yen and Franc; and trade officials from Korea to Singapore have issued warnings about the strength of their currencies.

Right now the main action is China and the US. Without a doubt, China has fought to keep the Renminbi cheap. Their reserves now total half of a year’s GDP, This isn’t a rainy-day fund; this is a global hot-potato. Anywhere they place the funds, they run the risk of destabilizing that country’s economy.

For now, we have the US Treasury attempting to nudge China to a higher exchange rate, and the Chinese saying “not so fast.” They have to keep growing or risk domestic instability. And the US needs to spur its domestic industry.

So far this war of words has been a phony war. No one has taken a decisive action that might spur punitive counter-measures. But this could change any time. The global economic elephants of American consumers and Chinese producers are squaring off. The stakes could not be higher, both for these countries and for the rest of the world. Because when elephants fight, bystanders can get trampled.

Douglas R. Tengdin, CFA
Chief Investment Officer
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