The Currency War of 2009–2011 was an episode of competitive devaluation which became prominent in the financial press in September 2010. It involved states competing with each other in order to achieve a relatively low valuation for their own currency, so as to assist their domestic industry. Due to the Great Recession, the export sectors of many emerging economies experienced declining orders and from 2009, several states began or increased their levels of currency intervention. According to many analysts the currency war had largely fizzled out by mid-2011 although the war rhetoric persisted into the following year. In 2013, there were concerns of an outbreak of another currency war, this time between Japan and the Euro-zone.
Both private sector analysts and politicians suggested the phrase currency war overstated the extent of hostility between the states which were engaged in competitive devaluation, but the term was widely used since Brazil's finance minister Guido Mantega September 2010 announced that a "currency war" had broken out.
Competitive devaluation in 2009 Following the Great Recession, widespread concern arose among advanced economies concerning the size of their deficits; they increasingly joined emerging economies in viewing export-led growth as their ideal strategy. In March 2009, economist Ted Truman became one of the first people to warn of the dangers of competitive devaluation.
On 27 September 2010, Brazilian Finance Minister Guido Mantega said that the world is "in the midst of an international currency war." Numerous financial journalists agreed with Mantega's view, referring to recent interventions by various countries seeking to devalue their exchange rate including China, Japan, Colombia, Israel and Switzerland.
Other analysts asserted that fears of a currency war were exaggerated. In September, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn and US Treasury Secretary Tim Geithner were reported as saying the chances of a genuine currency war breaking out were low; however by early October, Strauss-Kahn warned that the risk of a currency war was real. He also suggested the IMF could help resolve the trade imbalances which he saw as the underlying casus belli for competitive devaluation. Strauss-Kahn said that resorting to currency manipulation "is not a solution [and] it can even lead to a very bad situation. There's no domestic solution to a global problem."
Daniel Tenengauzer, the head of emerging-market currency and rates strategy at Merrill Lynch, suggested talk of a currency war was "political posturing", noting that emerging economies had been intervening on a wider scale back in 2009. George Soros expressed concern saying "I share the growing concern about the misalignment of currencies. Brazil's finance minister speaks of a latent currency war, and he is not far off the mark. It is in the currency markets where different economic policies and different economic and political systems interact and clash."
Considerable attention was focused on China. For much of 2009 and 2010, China had been under pressure from the US to allow its currency to appreciate. Between June and October 2010, China allowed a 2% appreciation of the yuan, but there were concerns from Western observers that China only relaxed her intervention due to heavy external pressure. After the June G20 meeting, the yuan appreciated by about 1%, only to slowly devalue again until further US pressure in September when the yuan began to appreciation again in light of congressional hearings which were to be held the same month to discuss measures to force a revaluation. Financial journalist Martin Wolf has suggested that instead of using protectionist measures that may spark a trade war, western economies would be better served by using targeted capital controls against China to prevent the country from buying foreign assets in order to further devalue the yuan.
Competitive devaluation in 2010 Negotiations at the 2010 annual IMF meeting In the middle of October 2010, finance ministers gathered in Washington, D.C. for the 2010 annual IMF and World Bank meeting, which was dominated by talk of currency war. Just prior to the IMF meeting, the Institute of International Finance had called for leading countries to agree on a currency pact to aid the rebalancing of the world economy and to avert the threat of competitive devaluation.
Canadian Finance Minister Jim Flaherty said "This is a crucial time that we need to address the commitment of our leaders to free trade, that we avoid protectionist measures." His US counterpart Timothy Geithner added that "global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery." Various international finance ministers said the IMF should help reducing the possibility of a currency war by encouraging non-competitive initiatives to expand national economies. The IMF, in turn, urged most developed countries to boost exports, and for some emerging markets to enhance domestic consumption and to let their currencies appreciate. Dominique Strauss-Kahn said the IMF would highlight the linkages between economies as part of a "systemic stability initiative". Its steering committee added that it would work on capital flows, exchange rate movements and the accumulation of capital reserves. Strauss-Kahn added "There is clearly the idea beginning to circulate that currencies can be used as a policy weapon...Translated into action, such an idea would represent a very serious risk to the global recovery...Any such approach would have a negative and very damaging longer-run impact." Australia's Federal Treasurer, Wayne Swan played down rumours of a currency war and said global financial ministers were working in a coordinated way to deal with "exchange rate reform". However, the opposition's finance minister, Andrew Robb, warned that with some countries were causing a trade war by deliberately devaluing their currencies and he urged Swann to alert "all of these other major countries to the very damaging implications of a currency war".
During the IMF meeting there was disagreement based on conflicting views about how the global economy could recover from the 2009 recession. Countries led by the United States said the best path forward was through the adoption of flexible exchange rates, while others, led by China, resisted calls to appreciate their currency. The IMF meeting in Washington DC was inconclusive, as China rejected calls to allow rapid appreciation of its currency. Currency war was scheduled to be discussed at November's G20 summit in Seoul.
In an article published after the IMF meeting the Financial Times reported there was little sign of fruitful co-operation. The U.S. repeated its calls for further appreciation of the yuan with China blaming America for causing problems to emerging markets with excessive quantitative easing. According to Cornell University's Eswar Prasad: "China's aggressive pushback against criticism of its currency policy by shifting the line of attack towards loose monetary policies and rising public debt in advanced economies reflects its growing assertiveness and strong resistance to international pressure." In another article that was published after the meeting Reuters said "a gradual but sustained revaluation of the yuan versus the dollar combined with a halt to the dollar's own depreciation" was the least bad way forward to resolving the currency war.
Martin Wolf opined the US would inevitably win a currency war, but suggested it was better if a collaborative solution could be agreed to at the November G20. A contrasting view was published by Chinese economist Huang Yiping who argued that as US did not win the last "currency war" with Japan it had even less of a chance of doing so against China. Alan Beattie was less optimistic than Wolf about the chances that the G20 would produce a "collaborative solution", as he considered the views of the participating countries on currency to be too divergent. Speaking very shortly before the G20 summit was due to begin, Canadian Prime Minister Stephen Harper also expressed doubts that leaders would be able to agree on a solution.
Negotiations at the 2010 G20 summit
Discussions over the currency war dominated the summit. Leaders such as Britain's David Cameron made statements suggesting good progress had been made but most commentators said no substantial agreement had been reached. IMF managing director Dominique Strauss-Kahn said this particular summit was "more of a G20 debate than a G20 conclusion". However, the communiqué issued after the meeting included commitments to support enhanced trade imbalances monitoring and possible work on future agreement for "indicative guidelines".
A report released after the summit by the IMF warned that without additional progress global imbalances could approximately double to reach pre-crises levels by 2014. The lack of any resolution by the G20 led to the Australian reserve bank to say that the country could be exposed to harmful upwards pressure on their exchange rates if the "currency war" did not abate.
By December 2010, talk of the currency war subsided, but the primary issues still remain unresolved with many emerging economies considering increased use of capital controls to cope with potentially de-stabilising capital inflows.
Competitive devaluation in 2011 January 2011 saw new interventions to prevent currency appreciation and volatility from Brazil, South Korea and Chile. Brazil's finance minister Guido Mantega who had raised the alarm about a currency war back in September, warned that matters were beginning to devolve into a trade war. By February, the US had stepped up diplomatic efforts to persuade emerging economies such as Brazil and India that China's intervention was the root cause of the currency war. However, the US once again refrained from labelling China a currency manipulator. A Treasury report said that while China was on track for an annual appreciation of 10% ever since the country relaxed its currency peg back in June 2010, the rate of appreciation was still insufficient.
In late February Bloomberg reported that talk of currency war had subsided, with several emerging economies choosing to allow currency appreciation as a way to combat inflation. February saw the US dollar fall to its lowest level since 1973, based on a comparison against a weighted basket comprising the currencies of its major trading partners. Analysts began to converge on the view that the Federal Reserve's QE2 program would begin to wind up by the middle of the year. Analyses from both private and central banks agreed with the Fed's assessment that reducing global imbalances was in everyone's interests and pointed out that various long-term trends would make the reduction likely to happen. The IMF's February 2011 economic outlook report on the global economy was generally positive, but noted that so far little actual progress had been made in reducing imbalances.
March saw analysts from BNP Paribas report that the currency war had ended – governments of emerging economies were increasingly deciding to accept currency appreciation so as to mitigate rising food prices which was one of the causes behind civil discontent that led to the Arab Spring. In April, the Financial Times joined Bloomberg in reporting that the currency war was beginning to fizzle out, pointing to the trend of emerging economies to allow currency appreciation as a means to offset inflation. However, Mantega disagreed with suggestions that the 'currency war' was over and said it was still on-going. In an April interview with the Wall Street Journal, Mantega spoke out against the loose monetary policies of advanced nations which she said had been aggravating inflation in emerging economies.