Exclusive supplement published by Bloomberg Brief Economics

1. Economics
Currency
Wars
MARCH 11, 2013
Brazilian Finance Minister Guido
Mantega has accused governments
of engaging in a currency war and
Bundesbank President Jens Weidmann
warned against politicizing the value
of the yen. In the following pages, we
explore what’s really going on.
inside:
Barry Eichengreen calls for more “currency wars” to bolster growth
Sanjay Mathur of RBS sees political posturing, not open warfare
David Powell on what constitutes a competitive devaluation
Michael McDonough on currency reserves accumulation
Joseph Brusuelas on the history of currency wars
Niraj Shah on global capital controls

2. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 2
overview david powell, Bloomberg Economist
Currency War Discussion Should Focus on Reserve Accumulation, Fair Value
As they struggle to boost economic percent, the move would seem to be justi- exchange rate can be used as a comple-
growth, some policy makers have focused fied by fundamentals. ment to a PPP model. Academic studies
on the value of their currencies, with fiscal The most often-used tools for currency have shown most deviations from the
and monetary policies having already been valuation are purchasing-power-parity level implied by PPP should be removed
pushed close to their limits. This focus has models. They calculate equilibrium over the course of 10 years. That average
sparked talk of a return to the competi- exchange rates, based on the theory value should act as an anchor.
tive devaluations that ended in economic that the long-term exchange rate is de- That second metric appears to confirm
disaster during the inter-war period. termined by the ratio of prices between the undervaluation of the pound. GBP/
Countries that intervene in the foreign- two countries. A higher (lower) level CHF is 27.1 percent below its 10-year
exchange markets to depress the value of inflation in one country relative to moving average. GBP/NOK is 19.4 per-
of their currencies may be most vulner- another will lead to a weaker (stronger) cent below that figure; GBP/SEK is 21.8
able to such accusations. That group currency. Most economists agree over- percent below that figure; GBP/CAD is
includes nations with fixed exchange or undervaluations of more than 20 20.5 percent below that figure; GBP/AUD
rates or “hard pegs” and those with “dirty percent are unsustainable. is 30.1 percent below that figure; GBP/
floats” or “soft pegs” . NZD is 26.8 percent below that figure.
Intervention results in the accumulation Real effective exchange rates can also
of foreign-exchange reserves. They can be used as a valuation metric. They are
‘‘
signal an undervalued currency. trade-weighted measures of a currency
The foreign-exchange reserves monitor adjusted for inflation. They tend to revert
on page 7 suggests Asian countries are to a long-term mean, such as the 10-year
most guilty of this practice. They held $6.7 moving average. Deviations from that
trillion in currency reserves at the end of average are considered by economists to
the most recent reporting period, equal to represent over- or undervaluation.
about 30 percent of GDP. China accumu-
lated the most foreign-exchange reserves
Policy makers’ focus Switzerland may be able to argue that
its intervention is justified because capital
within Asia. Their holdings totaled $3.3 on boosting growth has flows have caused its currency to veer sig-
trillion. That represents about 30 percent nificantly from its “fundamental value” Its
.
of Chinese GDP. sparked talk of a return to real effective exchange rate is still about 6
It indicates Switzerland has accumulated
the highest level of foreign-exchange
the competitive devalua- percent above its 10-year moving average.
The PPP model and the 10-year moving
reserves among the European countries. tions that ended in eco- average support that conclusion. They
They stand at $460 billion. That equals show EUR/CHF is undervalued by 10.7
about 73.9 percent of Swiss GDP. nomic disaster during the percent and 16.2 percent, respectively.
A country that refrains from intervention
can still be accused of trying to unfairly inter-war period. The Peterson Institute for International
Economics has produced its own valu-
control the value of its currency. The
two primary instruments of influencing
a currency apart from direct intervention
‘‘ ation metric called the fundamental ef-
fective exchange rate. It is the exchange
rate between a foreign currency and the
are monetary policy and capital controls, U.S. dollar that is expected to generate
though government officials can argue the current account deficit or surplus that
their policies have been prescribed in matches a country’s underlying capital
an attempt to influence other variables, flows. (For more details, see: Cline, Wil-
such as inflation, in the case of monetary liam R. & Williamson, John. Estimates
policy, or to eliminate speculation, in the The pound is extremely undervalued of Fundamental Equilibrium Exchange
case of capital controls. according to the PPP calculations of the Rates, May 2012. Peterson Institute for
Discussions of those attempts mostly Bloomberg Brief. It is 22 percent below International Economics, May 2012.)
focus on the distance of a currency from that equilibrium level versus the euro; The authors found Singapore has the
its “fair value” If a currency were close to
. 26.6 percent below that figure versus the most undervalued exchange rate in the
its fair value and to decline by 30 percent, Swiss franc; 20.7 percent below versus world. They estimate the Singapore dollar
the move would likely be viewed by policy the Norwegian krone; 35.8 percent below is 28.5 percent below its fair value versus
makers as fundamentally unjustified. By versus the Australian dollar; 34.9 percent the U.S. dollar.
contrast, if a currency were 30 percent below versus the New Zealand dollar. The following pages should help our
above its fair value and to decline by 30 A 10-year moving average of an readers navigate these issues.
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3. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 3
japanese policy sanjay mathur of RBS
Yen Weakness, Currency Wars Signal Political Posturing, Not Economic Reality
Japan’s new leaders have increased The latter has also been losing market That said, capital controls in Asia can-
pressure on the central bank to loosen share in global exports, even prior to the not be ruled out. In the short term, such
monetary policy to such an extent it has financial crisis, when the value of the yen controls could be effective, both because
sparked concern about global competitive was more competitive. During that period, of a genuine slowdown in currency flows
devaluations, or currency wars. I believe exports did not rise proportionately for all and because of the concern they bring to
those concerns are steeped in political non-Japan Asia economies, though that financial markets. The recent weakness
posturing rather than economic reality and can be attributed to a continuing loss of in the Korean won is an example of this
any managed depreciations will only be competitiveness against China. psychosis. The Thai baht and Philippine
effective in the short term. peso may also feel the pressure.
The global reaction to the Bank of In the long term, however, capital con-
Japan’s decision to fight deflation by trols are unlikely to reverse medium-term
‘‘
adopting a 2 percent inflation target and upward pressures on currencies. That is
shifting to “open-ended” asset buying has because the dominant source of appre-
been loud and clear. Policy makers from ciation pressure on most currencies has
South Korea to Germany and Brazil have been the current-account surplus and not
viewed the depreciation as a competi- Japan’s moves have per- debt-portfolio capital, the principal target
tive devaluation. The yen has dropped 17 of capital controls. While current-account
percent against the dollar since November haps rattled central banks surpluses have fallen in most economies,
2012, and concern about a currency war
between central banks has risen sharply.
in Asia more acutely they remain the largest component of
the balance of payments. Thailand is an
Japan’s moves have perhaps rattled cen- because they follow the exception in the probable set of countries
tral banks in Asia more acutely because that could impose controls, but even
they follow the expansion of the balance expansion of the balance so, its balance of payments has been
sheets of the Federal Reserve and the
European Central Bank over the past two sheets of the Fed and the bolstered by foreign direct investment, and
that is not the target of capital controls.
years. Based on recent announcements,
the expansion of the BOJ’s balance sheet
ECB over the past two
‘‘ Outside Asia, the consumption-driven
U.S. economy is unlikely to feel any threat
in fact looks larger than that of the Fed years. from Japan’s actions. It may make Japa-
or the ECB. In response, the Philippines nese imports less expensive and in turn
and Thailand have threatened to introduce help lift consumption in the U.S. economy.
their own capital controls. Europe is different — it could benefit
Would capital controls or currency de- from a weaker euro. Domestic demand is
valuations by other central banks actually weak because of fiscal austerity, so the
help a country’s competitiveness in the region’s reliance on exports is greater.
long term? Looking behind the headlines That makes a competitive euro important.
and the political maneuvering to the eco- Finally, regional production chains have European policy makers will doubtless
nomic reality, the answer is no. changed over the last decade. Several oppose Japanese monetary policy, though
First, currencies in non-Japan Asia economies have established regional they are unlikely to take further action as
remain competitive against the yen. The production networks by specializing in long as currency traders, rather than the
Bloomberg-JPMorgan Asia Currency intermediate products. According to esti- BOJ, dictate the strength of the yen. If that
Index shows the yen is still relatively mates by the IMF, the share of total Asian changes, it could open up the possibility
strong versus other Asian currencies. It exports that were intra-regional rose to 55 of tariffs on Japanese imports into the
was weaker in the run-up to the global percent from 45 percent between 2000 euro area or other punitive measures.
financial crisis, and for much of the time and 2009. Of that increase, intermediate It is one thing for developing countries
since. Exports from non-Japan Asia have exports accounted for about 70 percent. to engage in currency wars, quite another
been weak, though that is because global That shows depreciation of a single cur- when the developed world does it. That
demand has been weak, rather than be- rency does not necessarily raise competi- sets a bad precedent and creates the po-
cause of encroachment by Japan. tiveness; the higher import costs of inter- tential for tit-for-tat actions. From crisis, we
The Asian region has also made sub- mediate products can raise manufacturing could move to protectionism. In the long
stantial productivity gains against Japan. costs. The IMF also concluded that gains term, that could destabilize an already
For the most part, since 2011, manufac- from regional devaluation can be more precarious economic recovery.
turing productivity growth in non-Japan beneficial than those from the devaluation Sanjay Mathur is head of research and strategy at
Asia has outperformed that of Japan. of individual currencies. Royal Bank of Scotland in Singapore.
1 2 3 4 5 6 7 8 9 10

4. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 4
Currency Valuations david powell, Bloomberg Economist
Currency Current PPP Valuation 10-Year MA Valuation Purchasing-power-parity models calculate
equilibrium exchange rates, based on the
EUR/USD 1.2995 1.2484 4.1% 1.3167 -1.3% theory that the long-term exchange rate is
USD/JPY 93.93 82.62 13.7% 100.76 -6.8% determined by the ratio of prices between
GBP/USD 1.4997 1.7200 -12.8% 1.7281 -13.2% two countries. A higher (lower) level of
USD/CHF 0.9483 1.1297 -16.1% 1.124 -15.6% inflation in one country relative to another
will lead to a weaker (stronger) currency.
USD/NOK 5.7155 6.2825 -9.0% 6.1680 -7.3%
USD/SEK 6.4082 5.8043 10.4% 7.1348 -10.2% These PPP calculations use June 1991
USD/CAD 1.0313 0.9809 5.1% 1.1253 -8.4% as a base period because global imbal-
AUD/USD 1.0244 0.7545 35.8% 0.8461 21.1% ances (the sum of the absolute value of
the current-account deficits and sur-
NZD/USD 0.8274 0.6176 34.0% 0.7064 17.1%
pluses, as percentages of gross domestic
EUR/JPY 122.06 100.96 20.9% 132.17 -7.6% product, of Australia, Canada, Germany,
EUR/GBP 0.8665 0.7105 22.0% 0.7680 12.8% Japan, Norway, Switzerland, the U.K. and
EUR/CHF 1.2322 1.3805 -10.7% 1.47024 -16.2% the U.S.) were smaller at that time than
EUR/NOK 7.4275 7.6776 -3.3% 8.0709 -8.0% during any other quarter since data for
those countries has been available. That
EUR/SEK 8.3274 7.6152 9.4% 9.3453 -10.9% suggests exchange rates in the G-10 were
EUR/CAD 1.3402 1.1987 11.8% 1.4723 -9.0% closest to their equilibrium values in the
EUR/AUD 1.2686 1.6197 -21.7% 1.58167 -19.8% second quarter of 1991.
EUR/NZD 1.5706 1.9789 -20.6% 1.8798 -16.4%
The Swedish krona is an exception. These
GBP/JPY 140.86 142.10 -0.9% 175.79 -19.9%
PPP calculations for the currency use
GBP/CHF 1.4221 1.9367 -26.6% 1.9519 -27.1% January 1993 as a base period to exclude
GBP/NOK 8.571 10.8060 -20.7% 10.6403 -19.4% the volatility created by the Swedish bank-
GBP/SEK 9.61 9.2521 3.9% 12.2907 -21.8% ing crisis of the early 1990s.
GBP/CAD 1.5466 1.6872 -8.3% 1.9459 -20.5%
The problem of choosing the correct base
GBP/AUD 1.4639 2.2798 -35.8% 2.095 -30.1% period can be circumvented by using a
GBP/NZD 1.8125 2.7852 -34.9% 2.4746 -26.8% 10-year moving average of the exchange
CHF/NOK 6.028 5.5612 8.4% 5.537 8.9% rate as an equilibrium rate. Academic
CHF/SEK 6.7582 5.4896 23.1% 6.4147 5.4% studies have shown that most deviations
from the level implied by PPP should be
NOK/SEK 1.1212 0.9166 22.3% 1.1582 -3.2%
removed over the course of 10 years. The
CAD/CHF 0.9195 1.1517 -20.2% 0.9993 -8.0% average value during this period should
CHF/JPY 99.05 73.13 35.4% 89.68 10.5% act as an anchor.
NOK/CAD 0.1804 0.1562 15.5% 0.1823 -1.0%
SEK/CAD 0.1609 0.1929 -16.6% 0.1577 2.0% The British pound is
SEK/JPY 14.66 13.20 11.0% 14.17 3.5% extremely undervalued
CAD/JPY 91.08 84.22 8.1% 89.80 1.4% according to the purchasing-
AUD/NOK 5.8550 4.7402 23.5% 5.1572 13.5% power-parity calculations of
AUD/SEK 6.5647 6.8784 -4.6% 5.9737 9.9% the Bloomberg Brief.
AUD/JPY 96.22 62.33 54.4% 83.82 14.8%
AUD/CHF 0.9714 0.8524 14.0% 0.9333 4.1%
AUD/CAD 1.0565 0.7401 42.7% 0.9372 12.7%
AUD/NZD 1.2381 1.2217 1.3% 1.1941 3.7%
NZD/NOK 4.7292 3.8799 21.9% 4.3199 9.5%
NZD/SEK 5.3023 3.1094 70.5% 4.9988 6.1%
NZD/JPY 77.715 51.02 52.3% 70.563 10.1%
NZD/CHF 0.7846 0.6977 12.5% 0.7851 -0.1% The blue highlights show undervaluations of
less than -20 percent; overvaluations of 20
NZD/CAD 0.8533 0.6058 40.9% 0.7867 8.5% percent or higher are highlighted in orange.
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5. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 5
Valuation
Real Effective Exchange Rates Fundamental Equilibrium Exchange Rates
Overvaluation
Country Overvaluation vs USD
of REER
10.6% Australia 6.8%
Norway 15.2% New Zealand 13.4%
-3.1% China -5.9%
Deviation of
-7.6% Hong Kong -12.9%
REER From 10-
Sweden Year Moving 1.3% India -1.4%
Average (%) 1.1% Indonesia -4.7%
1.1% Japan -2.4%
Switzerland 1.0% Korea -2.4%
-4.1% Malaysia -10.2%
1.0% Philippines -4.5%
New Zealand
-24.5% Singapore -28.5%
-8.5% Taiwan -13.3%
1.1% Thailand -3.0%
Australia
0.7% Israel -0.8%
0.8% Saudi Arabia -2.2%
Canada CHF REER is 5.9% South Africa 3.8%
about 5 percent 0.5% Czech Republic -0.4%
above its 10-year 0.9% Euro Area -0.4%
Euro Area moving average. 0.5% Hungary -0.3%
0.7% Norway -1.5%
2.2% Poland 1.4%
U.K. 0.5% Russia -0.4%
-13.7% Sweden -14.4%
-4.3% Switzerland -5.5%
U.S. 23.2% Turkey 21.9%
0.8% United Kingdom -0.5%
1.2% Argentina 0.2%
Japan
2.3% Brazil 0.4%
0.5% Canada -0.4%
-30% -20% -10% 0% 10% 20% 30% 1.1% Chile -0.8%
Source: Bloomberg 0.9% Colombia -0.1%
0.5% Mexico -0.5%
2.2% United States 0.0%
0.7% Venezuela -1.0%
Source: Peterson Institute for International Economics
For the currencies of developed economies, real effective
exchange rates (the trade-weighted exchange rate adjusted for The Singapore dollar is 28.5 percent below its
inflation) tend to revert to a long-term mean, such as the 10-year fair value versus the U.S. dollar.
moving average. Deviations from that average are considered by
economists to represent over- or undervaluation.
1 2 3 4 5 6 7 8 9 10

6. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 6
intervention policies Niraj Shah, Bloomberg Economist
The table shows the intervention policies of various countries in the foreign-exchange markets. The nations highlighted in red are the
most likely to intervene, based on historical moves and statements from central bank policy makers.
% of % Change in
Policy
Majors World Currency Comment
Rate
Output Holdings (YoY)
QE may have weakened USD. Fed purchases $40 billion of mortgage-backed securities per
U.S. (USD) 21.42 0.25 -2.6
month.
Euro Area (EUR) 18.69 0.75 6.5 ECB avoids talking about FX. Takes view FX should be determined by fundamentals.
BOJ talking down JPY. Pursuing aggressive monetary easing by setting inflation target at 2
Japan (JPY) 8.38 0.1 -2.8
percent.
BOE has talked about impact of stronger GBP. Governor King voted to expand 375 billion-pound
U.K. (GBP) 3.49 0.5 14.4
QE program.
Canada (CAD) 2.48 1 4.2 BOC Governor Carney denounced exchange rate manipulation.
Australia (AUD) 1.97 3 -3.9 RBA has not signaled concerns over AUD strength.
SNB set a minimum exchange rate of CHF1.2 vs EUR to prevent currency strength in September
Switzerland (CHF) 0.94 0 72.6
2011.
Sweden (SEK) 0.77 1 34.4 Deputy Governor Ekhol has talked about having ammunition to prevent SEK gains.
Norway (NOK) 0.69 1.5 5.2 NOK strength was offset with rate cuts last year.
Hong Kong (HKD) 0.36 0.5 9.6 HKMA operates a pegged exchange rate system. HKD vs USD managed between 7.75 and 7.85.
New Zealand (NZD) 0.23 2.5 3.5 RBNZ Governor Wheeler ruled out QE. Claims rate cuts have minimal impact on NZD.
EMEA
Russia (RUB) 2.65 8.25 5.2 CBR uses an exchange rate target. A free float target due in 2015.
Turkey (TRY) 1.11 5.5 34.4 CBRT uses the interest rate corridor and reserve requirement ratio to contain TRY appreciation.
Poland (PLN) 0.74 3.25 8.5 NBP willing to intervene in FX if excess volatility in PLN.
South Africa (ZAR) 0.58 5 -0.1 SARB actively accumulates reserves.
Isreal (ILS) 0.35 1.75 1.7 Central bank willing to intervene to curb ILS appreciation.
Czech Republic (CZK) 0.31 0.05 CNB may use FX intervention to weaken currency, having reduced the policy rate to 0.05 percent.
Romania (RON) 0.26 5.25 -0.1 Uses managed floating target to keep EUR versus RON between 4.3-4.6.
Hungary (HUF) 0.20 5.25 -4.2 New NBH governor may target a weaker HUF.
Latin America
Brazil (BRL) 3.54 7.25 5.6 BCB intervenes to keep USD vs BRL range-bound.
Mexico (MXN) 1.65 4.5 11.3 Central bank set up mechanism in 2011 to prevent MXN weakness. No policy on MXN strength.
Argentina (ARS) 0.64 12.2 -9.9 BCRA intervenes to weaken currency.
Colombia (COP) 0.48 3.75 17.6 The government and central bank buy USD to prevent COP strength.
Venezuela (VEF) 0.45 16.43 -9 The government devalued the VEF to 6.3 from 4.3 against USD on Feb. 8.
Chile (CLP) 0.36 5 1.9 BCCH considering FX intervention. Halted USD buying in 2011.
Peru (PEN) 0.25 4.25 28.5 BCRP intervenes to slow the pace of PEN strength rather than reverse the trend.
Asia
China (CNY) 10.46 6 4.1 PBOC sets USD against CNY rate. PBOC moving toward FX liberalization.
India (INR) 2.64 7.75 -1.1 RBI intervenes in FX during currency volatility.
South Korea (KRW) 1.60 2.75 5.6 New government tolerating FX appreciation. Increasingly uses macro prudential measures.
Indonesia (IDR) 1.21 5.75 -2.9 BI intervenes in FX to combat IDR weakness.
Taiwan (TWD) 0.51 1.88 2.5 Intervenes in FX to defend against an appreciation in TWD.
Thailand (THB) 0.49 2.75 2.1 BoT uses FX intervention to contain volatility.
Malaysia (MYR) 0.41 3 4.6 BNM allowed MYR to strengthen. Only intervenes in excessive volatility.
Singapore (SGD) 0.34 0.04 5.4 The rise in SGD versus USD suggests MAS is willing to overlook currency appreciation.
Philippines (PHP) 0.32 3.5 10.2 BSP uses FX intervention and macro prudential measures to smooth appreciation in PHP.
Vietnam (VND) 0.18 9 SVB has left the USD vs VND rate unchanged since December 2011.
Red highlights countries most likely to intervene in FX
Source: Bloomberg
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7. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 7
FX Reserves Michael McDonough and Nipa Piboontanasawat, Bloomberg Brief
FX Reserves by Country Asia’s FX Reserves, While Biggest, Grew Slowest
FX Reserves By Region
TOTALS FX RESERVES % of GDP % of Total 3M% Y/Y% 70% 16%
Asia 6,668,659 30.1% 60.4% 1.0% 2.8% 60% 14%
Europe 2,028,592 4.5% 18.4% 1.9% 15.7% 12%
50%
Africa/Middle East 1,450,748 33.5% 13.1% 5.0% 13.2%
10%
North America 266,579 1.4% 2.4% -0.5% 7.4% 40%
South America 619,554 13.8% 5.6% 1.0% 7.6% 8%
30%
All 11,034,132 11.7% 100.0% 1.6% 6.7% FX Reserves as % of World Total (ls) 6%
China 3,311,590 40.1% 30.0% 0.8% 4.1% FX Reserves YoY% (rs)
20%
4%
Japan 1,191,627 19.9% 10.8% -0.4% -2.8%
10% 2%
Saudi Arabia 648,710 98.7% 5.9% 7.1% 23.4%
Russia 475,261 24.3% 4.3% 1.6% -0.4% 0% 0%
Switzerland 460,487 73.9% 4.2% 4.3% 80.9% Asia Europe Africa/ME N_America S_America
Source: Bloomberg
Taiwan 406,560 87.2% 3.7% 1.8% 4.2%
Brazil 376,073 15.5% 3.4% -0.4% 6.1%
Since the Asian financial crisis, countries in the region have built
South Korea 328,910 28.6% 3.0% 1.7% 5.6%
up foreign-exchange reserves to record levels. Asia currently
Hong Kong 321,000 124.4% 2.9% 6.4% 9.6%
holds 60 percent of global reserves, with China being the big-
India 259,786 13.3% 2.4% 0.4% 0.1% gest holder, while Japan, Taiwan, South Korea, Hong Kong and
Singapore 258,844 96.6% 2.3% 1.8% 5.4% India occupy five of the top 10 spots with the largest amount of
Eurozone 219,849 1.8% 2.0% 0.7% 5.6% reserves. Even so, foreign reserves in Asia grew 2.8 percent in the
Algeria 186,960 90.5% 1.7% 1.7% 4.7% latest period from a year earlier, the slowest pace when com-
Thailand 171,258 45.4% 1.6% 0.3% 2.1% pared with other regions, suggesting Asian economies may not
Mexico 165,005 14.2% 1.5% 1.5% 11.6% be aggressively pursuing weaker currencies. In Europe, where the
Malaysia 134,902 43.9% 1.2% 1.8% 4.6% amount of reserves is only a third of Asia’s, they expanded by 15.7
percent, more than five times the pace in Asia.
Indonesia 108,780 12.2% 1.0% -1.4% -2.9%
Libya 107,571 126.4% 1.0% 0.5% 3.3%
Turkey 104,999 13.4% 1.0% 5.8% 35.6% High Level of FX Reserves Raises Questions
Poland 100,317 21.3% 0.9% 3.6% 11.9% Biggest Holders of FX Reserves
Philippines 85,274 35.4% 0.8% 4.3% 10.2% 3500 700
Denmark 82,292 26.6% 0.7% 4.8% 5.2% 3000 600
Israel 78,400 31.8% 0.7% 3.3% 1.7%
2500 500
U.K. 64,947 2.7% 0.6% 1.6% 15.5%
USD Billions
Peru 58,161 29.0% 0.5% 6.8% 28.5%
USD Billions
2000 400
Canada 55,243 3.1% 0.5% 0.7% 4.6%
1500 300
Note: FX reserves are in USD millions for the latest reported period.
1000 200
FX Reserves as Share of Total 500 100
0 0
2003
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
China (ls) Japan (ls) Saudi Arabia (rs) Russia (rs)
Source: Bloomberg
Still, the high level of foreign exchange reserves of the world’s two
biggest holders — China and Japan — has raised questions over
their objectives. Reserves in China, which has been accused by
the U.S. of keeping its currency weak to promote exports, swelled
to $3.31 trillion at the end of 2012 from $286.4 billion a decade
ago, representing a pace of $829 million per day. Yet, the yuan
strengthened 33 percent against the dollar in that period. Japan’s
foreign reserves have ballooned since the global financial crisis
because of the yen’s status as a safe haven. China’s reserves
stood at 40 percent of its GDP, while Japan’s are at 20 percent.
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8. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 8
historical overview joseph brusuelas, Bloomberg Economist
Modern Currency Crises, Devaluations and Regime Changes Since Collapse of Gold Standard
Year Country Comment
1929-1939 Beggar-thy-neighbor policies in Great Depression All countries on list devalued their currencies versus gold by more than 10 percent.
1930 Spain Spain devalues five times between 1929-1937.
1931 Austria, Italy, Spain Austrian real GDP contracted 24.5% from 1929-1933.
Austria, Denmark, Finland, Greece, Japan, Norway,
1932 Japan departs from gold standard in 1931 and devalues yen over next three years.
Sweden, Spain
Volatility in Canadian dollar which returned to parity with USD by 1934. Bank of Canada
1933 Canada, Denmark, Greece, Japan, U.S., Yugoslavia
started operations 1935.
1934 Canada, Denmark, Greece, Japan, U.S., Yugoslavia REER of Danish Krone declined by over 20% from 1929-1939.
1935 Belgium Belgian franc devalued by 28% in 1935.
1936 Italy, Romania, Spain Italian lira devalued by over 20% between 1935-1937.
1937 Czechoslovakia, France, Italy, Spain, Switzerland Switzerland exited gold standard in 1936 and franc devalued by 30% through 1938.
1938 France, Netherlands France departs gold standard in 1936, 28% depreciation in 1938.
Collapse of Fixed Dollar Rate to Gold and
Era of Floating Exchange Rates
1971 U.S. Abrogates Bretton Woods Agreement Nixon imposes 10% import tax when gold convertibility suspended.
1985 Plaza Accord G-7 agrees to greater policy coordination to improve function of floating exchange rate system.
1992 European Monetary System Crisis
Italy withdraws from ERM Lira devalued by 7%.
U.K. withdraws from ERM 29% adjustment in sterling between 9/92 & 2/11.
1993 Tequila Crisis
1994 Mexico, Argentina and Brazil 58% depreciation in Mexican peso between 2/94 & 3/95.
1997 Asian Financial Crisis
Hong Kong, Indonesia, Malaysia, Philippines, South
57% depreciation in South Korean won in 1997.
Korea
1998 Russian Financial Crisis
Russia, Brazil, Hong Kong, Mexico 48% depreciation of the Brazilian Real
Economic collapse, bank runs, debt default and end of fixed exchange rate to U.S. dollar.
2000-2002 Argentina Regime Change
Resulted in 80% devaluation of peso.
2007-??? Era of Competitive Quantitative Easing
U.S., euro area, Japan, U.K. Central bank asset purchases, currency depreciations and volatility.
Source: Beth Simmons Who Adjusts? Domestic Sources of Foreign Economic Policy During the Inter-War Years, Princeton University Press, Bloomberg
U.S. Currency Policy 1969-2013
Tensions between policymakers due to volatility in
foreign-exchange markets pale in comparison to those Administration Period Policy
induced by the policies of the Great Depression. That pe- Nixon/Ford 1969-1971 Benign neglect
riod saw tariff and non-tariff barriers imposed by countries 1971-1976 Abrogated gold standard & devaluation
attempting to arrest the economic slide that characterized
Carter 1977-1978 Supported dollar depreciation
the global economy in 1929-1939. The coordination be-
tween the large global central banks that are engaging in 1978-1980 Intervened to reverse dollar depreciaiton
competitive QE has avoided the outbreak of protectionism Reagan/Bush 41 1981-1984 Benign neglect
that was observed during the 1930s. In Thucydides’ History
1985-1986 Plaza accord and suppport of dollar weakness
of the Peloponnesian War, he stated: “The strong do what
they can and the weak suffer what they must.” As the large 1987-1992 Promoted dollar stability
central banks attempt to boost their economies via QE, Clinton 1993-1996 Support of weak dollar
small and developing countries will likely have to adjust by
accepting faster inflation or accommodate to these policy 1997-2000 Strong dollar policy
changes by accepting currency appreciation. Bush 43 2001-2007 Benign neglect
2008-2009 Supported weak dollar policy
Obama 2009-2013 Supports weak dollar policy
Source: Bloomberg
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9. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 9
company focus bloomberg news
as it seeks to minimize the exposure of its Volkswagen AG plans to benefit from
These economy-related corporate anecdotes low-priced wine to the strength of Austra- lower labor costs and hedge against unfa-
are taken from Bloomberg News stories and lia’s currency. “We’ve been squeezed by vorable currency fluctuations between the
focus on the impact of currency movements.
the exchange rate,” he said. “I don’t see dollar and euro by building its best-selling
there’s any Australian company that hasn’t Golf hatchback in Mexico. “With its exist-
been squeezed by that.” (Jan. 15) ing infrastructure, competitive cost struc-
— David Fickling tures and free-trade agreements, Mexico
Watches is the ideal location to produce the Golf for
Airlines the American market,” said Hubert Waltl,
Swatch Group AG said its sales last head of production at VW’s passenger car
year would have been 500 million francs Swiss International Air Lines Ltd. brand. (Jan. 25)
higher if the franc were still at 2010 levels. CEO Harry Hohmeister said he’d prefer — Christoph Rauwald
“Foreign currencies stabilized somewhat the Swiss franc to weaken against the
against the Swiss franc but remain sig- euro. “We can be very satisfied that the Vehicle Parts
nificantly weaker than two years ago,” the SNB decided to set the threshold at 1.20
company said in a statement. (Feb. 4) against the euro,” he said. A rate of 1.35 Linda Hasenfratz, CEO of Linamar
— Anchalee Worrachate francs per euro would be “realistic when Corp., a Canadian maker of auto parts,
you compare the economies, but I would said a strong currency is an opportu-
Luxury Goods not recommend that the SNB intervenes
in that regard.” (Feb. 6)
nity for Canadian companies to expand
abroad, instead of threatening manu-
— Jennifer M. Freedman facturers such as her firm. “I like having
LVMH Moet Hennessy Louis Vuitton SA
a stronger dollar, I think it makes us a
raised some prices by an average 12 per-
cent at its flagship brand in Japan to offset Automobiles stronger country,” she said. “We can find
ways to compete, and develop strategies
the effect of the yen’s slide on sales. “We
that allow you to compete, and focus on
are an importer, so the weakening yen Honda Motor Co. claimed the weaker
innovation as your primary path to com-
and rising raw material prices are part of yen isn’t giving the Japanese company
petitiveness, not a low dollar.” Linamar
the reason for the price increase,” spokes- an advantage in the U.S. “I defy anybody,
has operations in Mexico, Hungary, Ger-
woman Kaori Fuse said. The increase when we’re building 90 percent of what
many, Asia and the U.S., and that diverse
is the largest since the Japan unit was we sell here, to say we have a currency
base provides a hedge against currency
established in 1978. (Feb. 20). advantage,” said John Mendel, executive
fluctuations. “We’re pretty much naturally
— Yuki Yamaguchi and Kenneth Maxwell vice president of U.S. sales. “I don’t think
hedged,” Hasenfratz said. “That’s another
the current level of 90-plus yen to the
strategy Canadian companies should
dollar is a cause for alarm.” The American
Harry Winston Diamond Corp. will raise be using, is to try to create as natural a
Automotive Policy Council said in January
jewelry prices in Japan as the yen’s drop hedge as you can so you’re not impacted
that President Barack Obama should tell
makes imports more expensive. The retail- by changes in the dollar.” (Feb. 8)
Japan’s new government that the U.S. will
— Ari Altstedter
er got about 12 percent of revenue from retaliate for policies aimed at weakening
Japan in the year ended January 2012, the yen. “Nobody worried about Japan”
according to Bloomberg data. (March 6) when the yen “went from 115 to 78, and Hankook Tire Co. in South Korea antici-
— Yuki Yamaguchi said ‘Geez, I hope those guys are OK,’” pates its exports to be hurt as Japan’s
Mendel said. “Now all the sudden it’s success in driving down the yen gives
Wine moderately off deathbed kind of rates, and
everybody’s going ‘Unfair.’ Let’s focus on
Japanese companies an advantage. “The
Japanese government under Abe is trying
the quality of products. Let’s focus on the to get their competitiveness by devaluing
Casella Wines Pty., An Australian wine the yen against other currencies,” said
maker, is looking at bottling so-called customer.” (Feb. 9)
— Craig Trudell Lee Soo Il, head of Hankook Tire’s China
bulk wine overseas to cut costs. “Bottling operations. “Short term, it’s going to work
overseas would carry risks” as local op- because they have price competitiveness.”
erations would become more competitive Hankook is working to overcome the un-
Nissan Motor Co. CEO Carlos Ghosn,
should the Australian dollar decline, Man- favorable currency by improving product
who has called 100 yen to the dollar the
aging Director John Casella said. “The quality, strengthening its brand image and
“neutral” value for the Japanese currency,
danger is you do it and you’re in no man’s marketing. “Exports are going to be af-
said the yen should weaken further. The
land — you’re over there when you should fected a little bit,” Lee said. “Already, some
yen is “still far from neutral territory,” he
be here.” Casella has announced plans for are saying that Japanese products are
said. (Feb. 26)
a more expensive wine to sell at around reducing their prices.” (Feb. 28)
— Anna Mukai and Yuki Hagiwara
$10 a bottle and entered a potential beer — Alexandra Ho
joint venture with Coca-Cola Amatil Ltd.
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10. 03.11.13 www.bloombergbriefs.com Bloomberg Brief | Economics 10
Q&A
Eichengreen of Berkeley Says World Needs More Reflation Policies to Support Growth
Barry Eichengreen, a Over the last couple of weeks, Japanese do anything and Japan lapses back into
professor of economics policy makers have made clear that their deflation and recession, that wouldn’t be a
at the University of Cali- goal is to raise the rate of inflation to 2 good outcome for the rest of the world.
fornia, Berkeley, spoke percent, try to end the country’s decade
to Nipa Piboontana- plus of deflation, raise asset prices and Q: What about U.S. policy makers?
sawat on Feb. 13 about get economic growth going again. We’re A: The experience of the 1930s suggests
the so-called currency not mind readers. The best we can do is that if the U.S. economy is growing too
wars, the weakening of to try to understand their objectives. slowly, if the dollar is too strong, if you
the Japanese yen and need more support for economic growth,
how other economies
Q: But what the Bank of Japan is doing then the appropriate response is for the
should respond.
has the effect of weakening the yen. Fed to further ramp up its asset purchase
A: Right, and if they don’t do that, with program. More quantitative easing here
Q: How serious are the present so- the Fed, the Bank of England, the Swiss will be good for demand, good for growth,
called currency wars compared with National Bank and other foreign central and limit appreciation of the dollar. I don’t
currency manipulation in the past? banks easing but the Bank of Japan not believe the conventional narrative that
A: The most direct parallel is from the easing, that would be a bad situation for characterizes the Fed as engaging in
1930s, when virtually all countries turned Japanese exporters and producers for the currency warfare, any more than I would
to expansionary monetary policies in domestic market as well. The over-strong characterize the Bank of Japan as being
response to the Great Depression. That yen has been a problem for the Japanese engaged in a currency war. It sounds
had the effect of pushing their currencies economy for some time. What’s going on facile to say, but if this is currency war
down in the foreign exchange markets here is that the Bank of Japan and new then we need more of it. Expansionary
one at a time. People misunderstand that government are trying to get the economy monetary policy in Japan is good for Ja-
experience when they call it “beggar thy going again. They are trying to get more pan under current conditions. Expansion-
neighbor exchange rate policy” or “cur- demand for Japanese products both at ary monetary policy in the U.S. is good for
rency war.” In fact, it was reflationary mon- home and abroad. They should be ap- the U.S. under current conditions where
etary policy, which was precisely what the plauded for doing so, if the alternative for growth is slow and inflation is too low.
world needed in a period of depression, Japan is stagnation and no growth.
deflation and slow or negative growth. Q: How much more competitive will the
And that’s where we are now, again. We Q: What should other countries be do- weaker yen make Japanese exports?
have slow growth, inadequate recovery or ing in response to the weaker yen? A: Exchange rates tend to react to mon-
outright recession, in the U.K., continental A: What you should be doing depends on etary policy innovations before inflation
Europe, Japan and the U.S. The central local conditions. If you are South Korea, does, but over time, if the BOJ is success-
banks of these economies are all easing your currency is too strong because the ful, there will be more inflation in Japan.
and trying to provide more support for won has been rising against the yen. Your That’s the goal of the policy. There will
reflation and economic growth. The ECB, inflation is so low, because Korean core be a weaker yen in the foreign exchange
admittedly, is doing less than the others. inflation is only 1.2 percent. And growth markets. The two things then cancel out.
If they all do this at the same time, there is so slow, because it’s currently running Japanese goods are no more or less com-
is no reason that their currencies need to below 2 percent. Monetary easing, just petitive if the yen is 10 percent weaker
move against one another. like the BOJ has been doing, is appropri- and Japanese prices are 10 percent high-
ate for your circumstances. On the other er. It’s important, in other words, not to
Q: So it is quantitative easing? hand, if you are Mexico, and growth is too confuse nominal and real exchange rates.
A: Yes, that’s what the Fed is doing. The fast, inflation is too high, you are worried What matters for export competitiveness
Fed is not trying to push down the dollar about frothy asset markets and now you is the real, inflation-adjusted exchange
against the euro or the yen. The goal in see your currency rising, the appropri- rate. Foreign exchange markets and stock
Japan is to hit a 2 percent inflation target. ate response is to tighten fiscal policy. markets react overnight to what officials
The BOJ has suffered from some self- Tightening fiscal policy translates into less say, but the inflation rate reacts over time.
inflicted communication problems, but that spending at home, less inflation at home, So officials in Brazil and elsewhere who
is essentially beside the point. less borrowing by the government, lower are complaining should be patient and
interest rates, and therefore a weaker give the Japanese inflation rate more time
Q: How do you differentiate between currency. It’s better for other countries to to catch up.
the two types of policies? figure out the appropriate domestic policy
A: You try to identify the strategy and response than to complain about the BOJ. This interview was edited and condensed. The full
tactics and statements of policy makers. It makes no sense. If the BOJ were not to version is at {NSN MJGT536TTDS9 <GO>}
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