QE2 Risks Currency Wars and the End of Dollar Hegemony

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by Ambrose Evans-Pritchard: IMF
Admits That the West Is Stuck in Near Depression

 

 
 

As the US Federal
Reserve meets today to decide whether its next blast of quantitative
easing should be $1 trillion or a more cautious $500bn, it does
so knowing that China and the emerging world view the policy as
an attempt to drive down the dollar.

The Fed’s "QE2"
risks accelerating the demise of the dollar-based currency system,
perhaps leading to an unstable tripod with the euro and yuan, or
a hybrid gold standard, or a multi-metal "bancor" along
lines proposed by John Maynard Keynes in the 1940s.

China’s commerce
ministry fired an irate broadside against Washington on Monday.
"The continued and drastic US dollar depreciation recently
has led countries including Japan, South Korea, and Thailand to
intervene in the currency market, intensifying a ‘currency war’.
In the mid-term, the US dollar will continue to weaken and gaming
between major currencies will escalate," it said.

David Bloom,
currency chief at HSBC, said the root problem is lack of underlying
demand in the global economy, leaving Western economies trapped
near stalling speed. "There are no policy levers left. Countries
are having to tighten fiscal policy, and interest rates are already
near zero. The last resort is a weaker currency, so everybody is
trying to do it," he said.

Pious words
from G20 summit of finance ministers last month calling for the
world to "refrain" from pursuing trade advantage through
devaluation seem most honoured in the breach.

Taiwan intervened
on Monday to cap the rise of its currency, while Korea’s central
bank chief said his country is eyeing capital controls as part of
its "toolkit" to stem the flood of Fed-created money leaking
out of the US and sloshing into Asia. Brazil has just imposed a
2pc tax on inflows into both bonds and equities – understandably,
since the real has risen by 35pc against the dollar this year and
the country has a current account deficit.

"It is
becoming harder to mop up the liquidity flowing into these countries,"
said Neil Mellor, of the Bank of New York Mellon. "We fully
expect more central banks to impose capital controls over the next
couple of months. That is the world we live in," he said. Globalisation
is unravelling before our eyes.

Each case is
different. For the 40-odd countries pegged to the dollar or closely
linked by a "dirty float", the Fed’s lax policy is causing
havoc. They are importing a monetary policy that is far too loose
for the needs of fast-growing economies. What was intended to be
an anchor of stability has become a danger.

Hong Kong’s
dollar peg, dating back to the 1960s, makes it almost impossible
to check a wild credit boom. House prices have risen 50pc since
January 2009, despite draconian curbs on mortgages. Barclays Capital
said Hong Kong may switch to a yuan peg within two years.

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the rest of the article

November
3, 2010

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