Once upon a time Bretton Woods ensured orderly exchange rates and the stability of the world economy. And then global currency trading mushroomed out of the control of nations’ central banks. Can it still be contained and an all‑out currency war averted?
Brazil’s finance minister, Guido Mantega, first referred to a “currency war” in September when alerting the world to the danger of the appreciation of the Brazilian real against the US dollar and the Chinese yuan. Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), repeated the metaphor soon after: “I am taking very seriously the threat of a currency war, even if it is a protracted one.”
This threat takes us back to the Great Depression of the 1930s, exacerbated then by competitive, “beggar my neighbour” devaluations amongst countries in recession. Today our international monetary system is radically different: there are many more protagonists and the rules of engagement have been redefined (see The new rules of engagement). Yet the stakes remain the same: economic growth and job creation, often driven by mercantile policies and turbo-charged by currency depreciation. Still the iron law remains true: a country with a cheap currency finds it easier to export because its goods and services are cheaper...