In 2010 Guido Mantega, then Brazil’s finance minister, accused the United States and fellow powerful economies of deliberately weakening their currencies in order to take a greater slice of global trade — what he called a “currency war”.
His comments sparked calls from officials at the World Bank and the International Monetary Fund for the world’s leading economies to do more to avoid inflaming tensions by pursuing protectionist monetary policies. The issue dominated the agenda of both the IMF meeting in Washington and the G20 meeting of world leaders in Seoul that year.
The idea that central banks in China, Japan, the US and the eurozone have deliberately attempted to devalue their currencies to improve competitiveness has since taken hold.
But investors and economists remain sharply divided on whether currency wars are still taking place as a phenomenon — if they ever did.
Some accept the arguments made by central bankers that monetary policy changes — such as pushing interest rates down or increasing the supply of money in circulation through quantitative easing — were intended to tackle other serious problems, such as low inflation.
“It is difficult to find significant examples of genuine mercantilist economic policy based on competitive devaluation,” says Alexis de Mones, head of fixed income at Ashmore, the emerging markets-focused asset manager.
Javier Corominas, head of economic research at Record Currency Management, the UK fund house, adds that even if Mr Mantega’s 2010 proclamation may have been justified at the time, it now seems out of date. “I am not sure we are in a currency war at the moment — we seem to be in an era of currency peace,” he says, and policymakers know the risks of such a war.
Many others, however, insist currency wars remain very much alive and thriving, to the detriment of investors and savers in emerging and developed markets. “I would argue that a number of central banks are engaged in currency wars — the most obvious example is the Riksbank in Sweden,” says Adrian Owens, currency fund manager at Swiss investment house GAM.
Sweden has a healthy annual credit growth rate of 8.8 per cent, house prices are growing at 18 per cent and GDP growth was 4.1 per cent last year. The country has a current account surplus of around 6 per cent of GDP.
Despite these reassuring economic signals, the Riksbank took market participants by surprise in February by pushing Swedish interest rates further into negative territory, to minus 0.5 per cent from minus 0.35 per cent, and said rates could fall further if needed. The Swedish krona weakened against the euro in the aftermath of the decision, rising to SKr9.59, from SKr9.47.
“On every metric, other than headline inflation, that’s a really strong economy. Yet [Sweden’s central bank has] said if their currency appreciates too quickly, they will intervene and [blame] headline inflation,” says Mr Owens. “But on every other metric what they are doing is completely inappropriate. That is as close to a currency war as you can get.”
Investors are bracing for further surprising, unwanted monetary policy shifts in the belief that volatile markets since the start of the year are likely to encourage central bankers to employ protectionist tactics.
This is despite global leaders at a G20 meeting in Shanghai in February agreeing to refrain from currency competition in what some perceived to be a currency truce.
Mr de Mones believes the meeting was reassuring for investors, triggering a strong rally in credit markets and emerging market currencies. “Since then, both the European Central Bank and the Bank of Japan have passed on opportunities to push their currencies lower, and the US Federal Reserve has played its part in this joint effort to reduce [forex] volatility by delivering a very dovish message,” he says.
Others are sceptical about whether the ceasefire will last. David Riley, head of credit strategy at BlueBay Asset Management, the London-based hedge fund company, says: “Markets have decided that, by accident or design, there is a ceasefire in the global currency war. If there was a ‘truce’, it is fragile.”
Mr Riley believes conflicting monetary policies are likely to become a reality once again as soon as the US Federal Reserve raises interest rates — as it is expected to do later this year — and if the ECB and the BoJ continue to pursue quantitative easing policies “in a desperate attempt to raise growth and inflation expectations”.
“The danger is that the extraordinary monetary policies that helped prevent a global depression in the aftermath of the 2008 financial crisis [will] descend into a race to the bottom, with China as the principal causality,” he says.
Indeed, China is one of the biggest concerns for forex strategists. At the end of March, China’s central bank weakened the renminbi significantly against the dollar, and several fund managers interviewed said that the currency could fall further. Some fund houses, including Amundi, Europe’s largest listed investment company, recommend shorting the renminbi as a result.
Investors are also closely watching Korea’s central bank for signs that it might weaken the won, in turn, to remain competitive against Japan and China.
Mr Owens says that while inflation is below target, this sort of aggression can be tolerated, but ultimately “there are lots of second-round effects that [central banks] do not fully appreciate”.
These effects include “protectionism and trade barriers which will be detrimental to global trade and economic activity”, says Abi Oladimeji, head of investment at Thomas Miller Investment, the London-based wealth manager. “[This in turn] will undermine investor confidence and result in higher volatility.
“So long as the global economy remains moribund, the temptation to adopt ‘beggar-thy-neighbour’ policies will persist.”