The dollar continued its decline against the world’s major currencies today as traders braced themselves for more action to prop up the US recovery.
Earlier this week, minutes from a meeting of the US Federal Reserve revealed the central bank was leaning towards pumping more money into the world’s biggest economy – known as quantitative easing (QE) – in a bid to jump-start growth.
Further QE in the US would mean putting more dollars into circulation and that has depressed the greenback, leaving it at a 15-year-low against the Japanese yen and its lowest level against the euro since January. The pound added another 0.5% to stand at more than 1.60 dollars today.
The decline in the dollar’s value has stoked concerns over a so-called “currency war” in which nations compete to keep their currencies from rising in value as the dollar sags.
China has come under fire in recent weeks amid accusations that it is distorting trade by keeping its currency weak to prop up exports.
Mark O’Sullivan, director of dealing with CurrenciesDirect, said a currency war could see countries revert to “1930s style protectionism” – an economic policy of restraining trade between states, through methods such as tariffs on imported goods.
He said: “Countries will be forced to take measures to protect their own currency, that they wouldn’t usually do – like import tariffs, which would mean moving towards protected markets, rather than free markets.”
Mr O’Sullivan said the devalued dollar is also leading to a hike in the price of commodities – such as wheat, gold and oil – which could mean more expensive goods for consumers. Gold, considered to be a safe-haven for investors, hit a record of 1,386 dollars an ounce, having already risen 25% this year.
He said there had to be “a realignment of currency” because if Asian countries try to artificially weaken their currencies there will be a surplus of dollars in circulation, which will “wash up” in Europe or back in the US.
Howard Wheeldon, senior strategist at BGC Partners, said it was becoming clear the patience of US authorities was “running out” with China, which must change its stance “if it is to avoid threats of reprisal actions”.
He said: “If Chinese lawmakers fail to reverse what many regard as a long policy of currency manipulation that has already seriously disadvantaged developed economies of the west through ever worsening trade deficits and corresponding devaluation of their own currencies there could be trouble ahead.”
But Robert Fogel, Nobel laureate in economics and professor at the University of Chicago’s Booth School of Business, said China was unlikely to change its position.
He said: “China, one of the most protectionist countries in the world, ignores the complaints of the Americans that together its trade and currency policies are ”beggaring“ its trading partners.”
He added that the global currency picture also reflected high unemployment in the US, Europe and Japan, particularly in industries reliant on exports.
He said: “It’s a mark of the times – eerily like the early 1930s – when virtually every country wants a higher value for the currencies of its trading partners.”
