The G-7 meeting seems to be caught in a looming currency war although the cause of such was only a misinterpreted statement that has since been corrected, affirmed and corrected again.
Was it really the comment that caused the acute awareness?
Maybe global competitors are becoming aware of economic revival through quantitative easing, initiated by governments around the globe, that have an unintended but positive effect on the strength or weakness of world currencies and can therefore be manipulated even further without raising serious questions from the World Trade Organization (WTO).
Now that we witness a slow global recovery, it becomes increasingly important for large trading partners such as the U.S., Europe and Japan to pay close attention to their respective cross-trade currency values that are a major underlying component of export and import activity and therefore indirectly influence domestic economic growth, inflation, deflation or stagnation.
It is fairly easy to acknowledge that the quantitative easing rounds, led by the Federal Reserve, during the recession and shortly after were viewed as methods to stimulate global economic growth and not as a government-led attempt to artificially manipulate their currency.
Today however, government interventions are being carefully examined and sometimes questioned, as there is indeed a very fine and sometimes invisible line between economic stimulus and currency manipulation.
A perfect example is the USD/JPY rate that until recently traded within the 77-80 range but has since weakened to 93.50, a decline of 18% in the last three months.
The Yen could further decline to reach 100 JPY/USD, which would stimulate Japanese exports and lift its economic engine from underneath 20 years of prolonged deflation.
The Japanese Government insists that its market intervention is only geared towards economic activity stimulus and not intended to target its currency valuation.
In a time of economic recovery and the trade possibilities that result from this, one can argue that global competitiveness is a key driver of recovery and exports receive a big boost from a weaker currency at the expense of the other trade partner.
The one that seems to be willing to maintain a steady balance, focused on economic recovery without the indirect impact of currency rates is the Eurozone, at least for the immediate future.
The euro has been strengthening gradually, not because of underlying economic fundamentals, but because of a weak USD and JPY.
More discussions will certainly be taking place at the upcoming G-20 Meeting in Russia.
It would seem to be an opportune time to clearly define not only the role of government intervention in the marketplace but also the unintended consequences on the open currency markets.
It would be wise for both the G-7 and the G-20 to reach agreement on such issues before the global economic recovery moves into high gears.
Written by Nick Doms © 2013, all rights reserved.
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