Macroscope | We’re not in a currency war yet, even if the market fluctuations have been unexpected

Hannah Anderson writes that a currency war would be the result of a conscious decision by central banks to lower the values of their currencies to give them an edge over their trading partners. What we’re seeing instead is a renminbi driven down by concerns over trade and an unexpectedly strong dollar

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Stacks of uncut sheets of US$1 dollar notes sit in a machine at the US Bureau of Engraving and Printing in Washington on November 15. The dollar’s value has been strong this year, despite expectations and most external indicators. Photo: Bloomberg

Published: 3:00pm, 10 Aug 2018Updated: 10:31pm, 10 Aug 2018

Just as reporters are quick to attach the suffix “-gate” to any story with the whiff of scandal, investors are keen to label any disruption to markets a “war”; recall that around the implementation of broad quantitative easing programmes, we had the “battle of the banks”, or how rising US protectionism quickly became a “trade war”.

Over the past couple of weeks, more investors have been asking me if we are in the early stages of a currency war.

“Currency war”, like “trade war”, is a loaded term. A currency war is when countries directly try to push the value of their currencies down so that they may gain an advantage over trading partners, also called competitive devaluation. Around the 2008 financial crisis, most major central banks were accused of purposefully trying to lower the value of their currencies through their aggressive policy response to the crisis. The term “currency war” does not spring up on its own – discussion of a currency is always tied to discussions of ongoing market phenomena.

Currencies reflect investors’ perceptions of the market outlook in countries relative to one another, as well as the relative availability of assets in each currency. Currencies rarely, if ever, move in response to contained domestic developments in their issuing markets; their values reflect investors re-pricing the relative outlook.

When considering movements in currency markets, investors should always ask, “Relative to what?” For example, contrary to consensus expectations, the dollar has risen, relative to other currencies, instead of falling this year. Investors had priced in growth and policy expectations for the US relative to the rest of the world.

United States President Donald J. Trump signs the US$1.5 trillion tax cut bill in the Oval Office of the White House on December 22, 2017, in Washington. Though credited with boosting consumer spending and stimulating growth, the tax cut has also been blamed for greatly increasing the fiscal deficit. Photo: CNP / Zuma Press / TNS