Currency war boomerang

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Wasn’t August the quietest month of the year, with many people enjoying a well-deserved break? Not on all fronts, because from an economic point of view, it is being anything but quiet, with continuous news about the trade war between the United States and China. Using the word war for a commercial conflict may seem exaggerated, but it serves to warn that it is something serious that would be best avoided: it is a situation in which everyone loses, although theoretically someone wins.

And to the commercial war, the currency war is now added. US President Donald Trump insists that China manipulates its currency to keep it cheap and thus facilitate exports. The yuan has suffered a 1.4% devaluation of the dollar, and has broken the psychological barrier of the 7 units per dollar, values not seen since 2009.

A cheaper yuan means that the products and services that China exports will also be cheaper, increasing the competitiveness of its factories and thus compensating for the tariffs that the United States can set. This has unleashed the wrath of Donald Trump, who called China a “currency manipulator.” Is that possible?

Foreign exchange control is an instrument that countries have been using for years to stabilize their economies. Those of us who have been in the market for a few years remember that in 1993 the Minister of the economy, Carlos Solchaga, devalued the peseta up to three times in nine months. It depreciated by 21%, in what is now known as the competitive devaluations of Solchaga. This devaluation fuel actually reduced the Spanish products and facilitating exports, but at the same time encarecía imports and the foreign investors who had confidence in Spain now had assets with a lower value, which caused capital outflows.

On a personal level I could not complain, because in 1993 I was working in the United States and the dollars I won were 21% more when I returned to Spain. But if the refund had taken place a year earlier, when I was still studying, it would have cost my family much more to support me by having to pay with the pesetas my parents earned working here.

In China, its central bank (the people’s Bank) sets the price of the yuan every day and lets it oscillate by 2% upwards or downwards. The central Bank of China set it at 6.9225 yuan per dollar, and it was the market that raised it above 7 yuan/dollar. Trump’s reaction was to write a tweet asking the Federal Reserve to lower interest rates further to lower the dollar, but the Fed is not dependent on it and can act on economic criteria and with a calmer analysis. And the next day, with a bond sale in Hong Kong, the yuan went up 0.2% and recovered some of the lost.

But in this war, President Donald Trump can get his butt shot, as we would say in colloquial terms. As the US dollar is a global currency refuge in periods of instability, if the current escalation continues and we enter a period of greater volatility, it is very likely that from all over the world US Treasury bonds will be purchased as the safest asset, and this large inflow of monetary flows will end up raising the value of the dollar against the other currencies… which is just the opposite of what it seeks!

And what is the situation of our companies in this environment? They will need, once again, adaptability and flexibility. If the yuan drops, imports of products from China will be cheaper. If China sets barriers to the purchase of certain products in the United States, European producers can open up markets in the Asian giant. If the United States imposes tariffs on Chinese products, our production will be more competitive for American consumers. In the globalized economy, it is necessary to adapt quickly to the new circumstances, whatever they may be, in order to take advantage of the opportunities.

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