Royal Bank of Scotland (RBS) is the latest bank to focus on the prospect of ‘currency wars’ erupting, caused by countries seeking to secure an unfair trade advantage by improving competitiveness through depressing their currency.
During 2012, developing countries such as Brazil accused the US and other advanced economies of deliberately driving down their exchange rates through measures such as quantitative easing (QE) and a report last month by Royal Bank of Canada (RBC) strategists suggested that a group of 10 central banks are becoming increasingly active in attempting to lower currencies.
In the earlier RBC report, strategists Adam Cole and Elsa Lignos wrote: “We find substantial evidence that exchange rates are playing a greater role in central banks’ policy decisions. It would seem that G-10 is doomed to follow emerging market [EM] central banks down the path of rising intervention, or at least exchange rate-driven policy.”
An RBS research note, issued 16 January and reported in the
Wall Street Journal
, assessed the willingness of individual countries to intervene in the foreign exchange (FX) markets and their ability to do so, given the structure of their economy. According to the UK bank: “This year could see [the] currency fracas morph into something more internationally combustible: a global currency war.”
RBS singled out Malaysia, Thailand, and Chile as three EM countries likely to lean against currency appreciation, along with the Czech Republic, a relative “newcomer to currency manipulation.” RBS’s strategists, David Petitcolin and David Simmonds, also suggested that Sweden could abandon its traditional reticence to intervene in the markets. However, they believe that China’s willingness to intervene is tempered by its strong export performance, while Brazil’s exports account for only a small proportion of the overall economy.
“For the quantitative easing-leading Japan and US, currency competitiveness is not the lead policy obsession,” the RBS research note states. “Rather, it’s a welcome consequence of the need to loosen financial conditions to reflate domestically.”
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