All signs point towards a currency war, and the pressure to avert it seems to lie squarely on the G-20. The current climate in the global currency market has included wild fluctuations, and a negotiated deal among the worlds' economic powers is needed to stop it.
The G-20 is working against a climate of volitity and record-breaking extremes. The Canadian dollar hit par with the USD yesterday, the Japanese Yen is at a 15 year high, and strength of many currencies seem to do more with what economies fair least poorly rather than what economies are prospering. As a result, the need to calm the currency market down is the dominant issue for the upcoming G-20 meetings that will be held in South Korea next week. As they work to negotiate a new arrangement on exchange rates, the G-20's credibility may very well be hanging in the balance.
The wild fluctuations in some of the world's main currencies have been a pressing concern for months now as economic data continues to highlight that economic growth is continuing to slow down in developed economics. In the USA, for example, the unemployment rate still has not come down, which hovered at 9.6 per cent last month. Theat translates to a whopping 15 million people out of work, and 6 million of them have been out of work for more than 6 months.
Despite all-time low interest rates, and hefty dificit spending by most of the world's biggest economies, the efforts have not spurred strong global economic growth. With nothing left to do to improve the situation, governments are turning to devaluing their currency, or at least preventing it from going up, to keep their exports competitive. This is what could provoke an all out currency war.
Averting such a scenario was not the originally on the agenda for the G-20 meetings in South Korea, but has become priority since the last formal meeting in July in Toronto.
The debate mainly focusses on the US and China, as the US argues that China should allow tthe yuan to rise more quickly, but China maintains that run-away strength in their currency would devastate their economy which is almost soley dependent on exports, and would result in massive unemployment and social upheaval. China has caved somewhat under the pressure, allowing the the yuan to rise slightly to hit a record high against the US dollar recently. But the rise in the yuan is not happening fast enough for the US.
Conflict of interest also plays a role in the dispute as South Korea, who will be chairing the G-20 meeting late next week, is a political ally of the US hosting thousands of US troops on their soil, but also has deep economic and social ties with China. To top it off, South Korea has taken action to limit the rise of it's own currency recently. The pressure is certainly on to find some semblance of a resolution, as the whole world will be watching.
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From the Desk of
Aaron Reid
Forex Strategist
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