Currency War Renunciation is Call for Talks

On February 16, the G20 Finance Ministers and Central Banks Governors signed off the communique, where G20 countries agreed to refrain from competitive devaluation.

Financial G20 reiterate their commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals and avoid persistent exchange rate misalignments.

Currency war presupposes reduction in the national currency value as compared to a foreign currency to provide for the domestic manufacturers' price advantages. Currently Turkey and Japan have been actively devaluating their currencies. But International Monetary Fund CEO Christine Lagarde said that the weakening of the Japanese yen is not the manifestation of currency war on the part of Tokyo.


The matter is in the following: to admit the fact of currency war one has to determine a fair exchange rate of the national currency against the US dollar. The Japanese monetary authority and the majority of experts are unanimous in the fact that the equilibrium yen exchange rate is about 102-107 yens to the US dollar, while during the last several years the yen exchange rate was even below 80-70 yens to the US dollar. Originally it could be interpreted as the dollar's war against the yen, but today it seems that the yen fights back against the dollar. What happens to the yen today may be explained as the Japanese currency's return to its fair exchange rate.


The European currency has faced a very similar situation. When the euro was introduced in the beginning of the 2000's, its rate of exchange was lower than that of the dollar. Later the euro strengthened. But it happened, most probably, because of foreign capital inflow into Europe's economy rather than the economy's being efficient. And if the ECB will go as far as devaluating the euro, it will not be considered as currency war, rather - the return to the fair exchange rate.


I think that the euro has appreciated by more than 20% against the US dollar (PPP and labor productivity basis). The fair ratio must be 1:1.1. Maybe, even less. But I don't think the American monetary authorities will allow such a considerable devaluation of the euro, for it will give a distinguishable advantage for the European exporters against the American suppliers.


Currency wars renunciation is call for talks. At the very start it will have to be proved that a country has changed the fair exchange rate to eliminate deviations, and currency cheapening is not an unjustified retaliatory action.


A.L. Vedev - Director, Center for Structural Studies