China's Devaluation Invites Global Currency War

Well, remember, China's moves represent the highest stakes in international politics, although folks don't often realize it. The currency issue at base is about international preponderance, which nation-states command the most world monetary power. It's still the U.S. at present, a fact that rattles rogue regimes in Beijing, Moscow and beyond.

See the New York Times, "China’s Renminbi Devaluation May Initiate New Phase in Global Currency War":

For years, China looked like the principled noncombatant. As other countries, seeking to secure an economic advantage, let the value of their currencies slide on international markets, China held firm on the value of its money.

But this week, China jumped into the fray. In a surprise decision on Tuesday, the country’s authorities began sharply devaluing its currency, the renminbi. While the plunge paused on Friday, the renminbi was still down 4.4 percent against the dollar this week, a huge drop for China.

The abrupt move opens a new phase in what some analysts see as a long-raging global currency war, a development that could leave the United States exposed and undermine efforts to pull the world economy out of the doldrums.

The yen, the euro and several other major currencies have fallen in recent years against the dollar as the Federal Reserve has cut back its stimulus and policy makers elsewhere have sought to obtain gains for their sluggish national economies.

But the countries that don’t join the devaluations, like the United States right now, can end up suffering, if they export less and import more. A steep drop in the value of the renminbi could also intensify some of the forces that, in the view of some economists, have caused the American economy to underperform.

“The risks of a deflationary, secular stagnation in the U.S. would be increased by a large devaluation of the renminbi,” said Lawrence H. Summers, the former Treasury secretary. Mr. Summers, however, cautioned against overreacting. “One has to be very careful about regarding market fluctuations and uncertainty among market participants as a crisis that demands major government interventions.”

Even so, the Fed faces a dilemma as it contemplates raising interest rates for the first time in more than nine years. A rate increase could drive the dollar up even more against other currencies, creating a vexing obstacle for the American economy at a crucial moment in its recovery.

“We’ve been in a currency war for six years,” said Stephen S. Roach, a senior fellow at the Jackson Institute for Global Affairs at Yale University. “China is now moving on its currency, and other countries are using their currencies as a tool to relieve distress, and that is potentially destabilizing.”

China’s devaluation stems in part from a desire to let markets influence the price of the renminbi, a shift global policy makers have advocated. If managed well, it may give China a lift and the extra flexibility it may need as it deals with the challenges facing its economy.

At a news conference on Thursday, officials from the Chinese central bank defended the devaluation and said it would be managed carefully. Zhang Xiaohui, an assistant governor at the central bank, said that there was “no basis for the continued depreciation of the renminbi.”

The hope among global policy makers, of course, is that the changes in exchange rates are not excessive and do more good than harm. Still, history shows that currencies often go down too much or go up too far, interrupting the strong trade flows that have underpinned the global economy for decades...