Currency Wars

From Goldman Sachs Research, this is Alison Nathan. Welcome to Top of Mind, a podcast that explores macroeconomic issues on the minds of our clients. In this episode, we're talking about the dollar. It's the world's most important currency, underpinning much of global trade and finance. And it's also been getting stronger and stronger for some time now. On the one hand, that's a good good thing because a country's currency typically reflects the relative strength of its economy and the appeal of its assets. For that reason, since the mid nineteen nineties, presidential administrations have act

Today, you see this tweet, the president calling for a lower dollar in effect. That's just not something typically you've seen presidents do in the past.

It's also no surprise that currency has now become a new front in The US China trade war. Just weeks ago, the US Treasury declared China a currency manipulator, a designation last used in 1994, which implies that a country is deliberately weakening its currency to boost its competitiveness. And this on the heels of China allowing the yuan to move to its weakest point against the dollar in a decade. They devalue their currency. They have for years. It's put them at a tremendous competitive advantage. Given all this, the question of whether the US government should, could, and would begin to act

There's no good definition of currency war. The word most recently, prominently was used by the Brazilian finesse minister ten years ago to attack quantitative easing in The United States, which was easy monetary policy. I think that's very misguided because I think we know that easy monetary policy does weaken currencies. That's true. But it has beneficial effects even on foreign countries, for example. If we have easy monetary policy in The U. S, yes, the dollar weakens. But also lower interest rates, easier borrowing conditions in The US spur more spending in The US, which helps to suck in

That said, Guenon actually sees a decline in currency manipulation globally from what he's called a decade of manipulation between 02/2013 when some countries pursued these zero sum policies. You've called the period between 02/2003 2013 a decade of currency manipulation. Why is that, and is currency manipulation still as big of an issue today?

So my coauthor Fred Bergson and I have called that decade, it's really eleven years, a decade of currency manipulation. Because during that period, foreign currency purchases by governments just soared to levels that were much higher even relative to the size of world GDP than ever before. And we estimate that excessive purchases averaged more than $500,000,000,000 a year during that period. Total purchases of all currencies by foreign governments averaged a trillion dollars a year, just out of all proportion to anything that happened in previous history. So now is it still an issue? Well, sta

And why do we have that shift in the 2014 period?

Well, I think there's a couple reasons. I think to some extent as countries recovered and the global economy finally sort of gained better recovery, people felt less need to do it. Also, the dollar strengthened somewhat starting in late twenty fourteen and 2015. And countries tend to do this more when the dollar is weak than when the dollar is strong. And so they felt less need to push their currencies down since they were already down against the dollar. And finally, there was increasing realization and talk among countries that this kind of currency manipulation, excess currency purchases is

But while Gagnon sees no evidence of a currency war