The Beginning Of A Crisis
The 2008 aftermath saw a surge in currency wars. However past two years have been pretty calm as the currencies tried to regain the fabric essential for sustained global economic growth. This fabric now seems at risk.
China central bank (PBOC) devalued its currency by more than 4% in past three trading sessions. Yuan is at lows last seen in 2011. China central bank and government came under immense pressure to infuse strength in the weakening economy. The Cen bank earlier last week stated to avoid use of easy money policy to stimulate the economy. The Yuan devaluation is a step to increase exports for the export dependent country. More importantly the step is a tool to stand against the impending rate hike from the US Federal Reserve as early as September this year. The US dollar has gathered tremendous strength past one year and a rate hike would assure its status as the world power for even longer period. The investment flows would be largely diverted to dollar denominated assets.
Most of the currency have suffered more than 1% devaluation soon after Yuan devaluation step. But alas, when the world’s second largest economy devalues its currency to increase exports and thus stimulate growth what options are the developing or smaller countries are left with??? Exactly what you are thinking at this moment. An eye for an eye. They will also start devaluing their currency by any means available to them as an alternative to the step from other major world powers. This is known as Currency Wars.
The world is already staring at a deflation crisis as commodity prices have largely entered in a long term bear cycle. The deflation would put the world in a Japan dilemma – the crisis Japan have been dealing with since decades now. When most of the countries try to devalue currency against dollar to increase exports, who would be standing at the other side of the fence. Right now many. But once the process of fragmentation of the fabric starts the member counts would be surely numbered. It’s more than currency war. Currency manipulation tools is just the start of risking the fabric that combines financial and economic threads for sustained global growth. Stay tuned at COMMTATHYA.