Currency wars create range of challenges

THE prospect of global currency war presents a fresh challenge for governments and financial markets worldwide, including Australia.

The Russian central bank’s deputy chairman, Alexei Alyukayev, has criticised Japan for weakening the yen, and warned that other countries may follow.

Jean-Claude Juncker, prime minister of Luxembourg and chairman of the Euro-group of finance ministers, also complained, claiming the value of the euro is ‘dangerously high’ following a three-month surge.

The push for a weaker currency is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of steam.

The risk is that, as each country tries to boost exports it hurts the competitiveness of other economies, thereby provoking retaliation.

This skirmish may lead to a clash of G20 finance ministers and central bankers when they meet next month in Moscow, three months after reiterating their 2009 pledge to ‘refrain from competitive devaluation of currencies'.

Brazil and China, as well as more economically developed Japan and Switzerland, have taken steps to push down the value of their respective currencies over recent years.

Since last October, just after Shinzo Abe emerged as leader of Japan’s Liberal Democratic Party, the Japanese yen has undergone one of the fastest currency depreciations since the collapse of the Bretton Woods system of monetary management in 1971.

But it’s against the Australian dollar that the yen has plunged the most.

The  has appreciated 19 per cent against the yen since October but only 3 per cent against the US greenback.

Prime Minister Abe is pressing the Bank of Japan into loosening monetary policy, demanding that the bank double its inflation target to 2 per cent and support this with unlimited bond purchases.

Meanwhile, the Japanese stock market is up nearly 10 per cent over the past month.

By not debasing its currency until now, Japan has allowed its export profits to be slaughtered as Europe, the US and China rebuild their economies on the back of exports.

Mr Abe has now declared that enough is enough and it’s time for Japan to regain its lost market share through discounting.

In a separate move, holder of the world’s second-largest gold reserves, Germany, has announced that it wants to repatriate 20 per cent of its gold reserves from the US and France, by 2020.

Most of the reserves were kept abroad for safety reasons during the Cold War for fear of a Warsaw Pact invasion.

A spokesman from Germany’s central bank, the Bundesbank, was amazingly blunt about the reasons for the move, telling Forbes magazine: “We have no intention to sell the gold … [the relocation] is in case a currency crisis hits the European Monetary Union.”

There are no shortages of dire predictions floating around about how badly today’s currency wars could end.

James Rickards, the author of Currency Wars: The Making of the Next Global Crisis, contends that the outcomes could include a collapse of faith in the US dollar and the rise of multiple reserve currencies, a return to the gold standard – or chaos, his most likely ending.

With the seemingly headed back towards parity with the yen at the same time as the dollar is above parity with the greenback, this represents a double challenge for Canberra and Australia’s Reserve Bank.

• Steve Blizard is a senior securities advisor at Roxburgh Securities