Euro’s slide reignite talk of ‘currency war’

06/04/2015 07:53 AST

The euro's slide against the dollar has reignited talk of a "currency war", with analysts in opposing camps over whether or not countries are consciously playing with their exchange rates.

War language is no stranger to modern monetary policy.

The massive bond buying programs, or quantitative easing (QE), that central banks have used in response to the financial and economic crises that have rocked the global economy since 2008 are often referred to as a bazooka.

After lowering interest rates, sometimes to zero or even into negative territory, major central banks turned to buying government and corporate bonds to stimulate the economy.

First tried by Japan in 2001 to combat deflation, the US Federal Reserve began using it in 2008 to respond to the financial market crisis and pull the US economy out of recession.

Japan used QE with more success in 2013 after Shinzo Abe came to power, and the European Central Bank joined the party in March. But central banks fired this bazooka as governments had little they could do.

"We are really in a situation where monetary policy has substituted for budgetary policy" as "the governments don't have any more budgetary margin for maneuver," said Saxo Banque economist Christopher Dembik.

And the bazooka wasn't directly aimed at exchange rates.

The bond purchases inject money into the economy, thus addressing any concerns about market liquidity. To the extent the funds result in new investments in the real economy it stimulates growth, another aim of QE policies.

But some funds end up leaving the country as investors seek better returns elsewhere. This pushes the value of the currency down, which is also not an unwelcome effect for policymakers as this favors more exports of goods and services and thus growth.

"The currency weapon is rarely the official objective," said Patrick Jacq, a bonds specialist at BNP Paribas bank.

Led by Brazil, developing countries charged that the US QE program was a first shot in a currency war because their economies suffered as exports slumped thanks to the weak dollar. Those complaints were brushed aside with commitments by the leading economies to "market-determined exchange rates".

But public comments from elected officials about currency values often muddy the waters about policy objectives, even if central banks in most major economies are independent. Lowering a currency's value may not be the stated policy objective "but they are thinking it so loudly all the world hears it," said Rene Desfossez, a bonds specialist at Natixis investment bank.

AFP