How The "Currency Cold War" Between The US And China Could Heat Up

For some reason, currencies are a particularly difficult concept for Americans to wrap their heads around. Just ask the new US President, who reportedly called his national security advisor at 3am one day in February to ask if a strong US dollar was good or bad for the US economy. Not surprisingly, the national security expert allegedly demurred, suggesting that the President ask an economist instead.

Frankly, even an economist would have difficulty answering that question unambiguously. In addition to reflecting a generally healthy economy, a stronger currency can increase the buying power of the citizenry, often at the expense of domestic industry. On the other hand, a weaker currency can make a country's exports more competitive, though it can increase inflation.

Back in the depths of the Great Financial Crisis though, when global inflation was essentially flat and unemployment rates were abnormally high, the answer to the President's question would have been clear: most countries preferred  to have a weaker currency, reasoning that it would boost international demand for its goods. This preference led to the trumped up (no pun intended) "Currency Wars" of 2010-2013, where countries flirted with beggar-thy-neighbor competitive devaluations and protectionist policies to boost their domestic economy, often at the expense of global prosperity.

Based on early comments from the administration, there's a risk of a similar economic conflict breaking out once again. In just a two week period, Trump’s noted that the dollar is “too strong” against the Chinese yuan and “it’s killing us," while White House trade advisor Peter Navarro’s accused Germany of using a “grossly undervalued” euro to “exploit” its trading partners. As a result of these comments and the actions of other G10 central banks, the analysts at PIMCO have dubbed the current FX landscape as a "Currency Cold War."

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Bill Myers 4 years ago Member's comment

Enjoyed this article, thanks. Looking forward to more by you.

Matt Weller 4 years ago Author's comment

Thanks Bill!

Bill Johnson 4 years ago Member's comment

Very well done. You've summed up a complex issue rather well. I believe #Trump wouldn't think twice about direct protectionism. He seems to have no qualms about instituting punitive tariffs on #China.

Alexis Renault 4 years ago Member's comment

Can #Trump unilaterally enact a #tariff on his own?