Propaganda is a vital part of any war. Currency wars are no different. Emerging markets – led by Brazil and its outspoken finance minister, Guido Mantega – are engaged in currency skirmishes against each other and the US. Since the US Federal Reserve deployed a second round of quantitative easing – the financial equivalent of nuclear weapons – the screams of anger from emerging markets have become deafening.
It is not hard to see why they are so upset. Emerging economies may be steaming ahead, but could be derailed by excessive currency strength.
Consider some examples. The Brazilian real is up 38 per cent since January 2009 against the dollar. The Indonesian rupiah is up 22 per cent; the Indian rupee 8 per cent; and the Korean won 12 per cent.
For Brazil, this is the equivalent of adding 17 per cent a year to export prices. No wonder they want more currency restrictions.
Yet, financial propaganda almost always comes down to selective use of statistics. Emerging markets are twisting this one to their benefit.
January 2009 was just three months after Lehman Brothers collapsed and the world was still fearful. Go back to September 2009, before the Lehman-inspired flight to the dollar, and emerging markets have little to complain about.
Since then, the real is actually down slightly, along with the rupiah, rupee and won. The rouble and Turkish lire are far weaker.
Many emerging markets have seen their exchange rate strengthen rather more when adjusted for inflation, but this is hardly ground for complaints of currency manipulation. Equally, the Brazilian currency’s strong run earlier in the decade cannot be put down to currency manipulation, by the US or anyone else.
Emerging markets should worry less about QE2-inspired hot money flows destabilising their currencies and more about how they will stop inflation becoming embedded.