Even before the recent Chinese currency devaluation, the Trump administration had ramped up its rhetoric regarding the role of US trading partners in foreign exchange markets from accusations of “manipulation” to allegations of a “currency war.” The White House was very unhappy recently – blaming the US dollar’s strength on central bank stimulus elsewhere – when Mario Draghi, president of the European Central Bank, hinted that more easing was on the way.
Currency wars are not new. During the 1930s, many economies abandoned the practice of fixing their exchange rates to the value of gold and allowed their currencies to fall precipitously. This led to what has come to be known as “competitive devaluations” and “beggar thy neighbor” policies.
In the early 1970s, the Nixon administration suspended the convertibility of the US dollar into gold and other assets and closed the gold window so that foreign governments could no longer exchange their dollar reserves for gold. The dollar plummeted, causing consternation among trading partners.
More recently, in 2010, the massive Fed quantitative easing program pushed down the US dollar and produced howls of protest from the emerging world. Then Brazilian Finance Minister Guido Mantega accused the United States of waging a “currency war,” in the process popularizing the term.
Not all currency manipulation has been contentious, however. In 1985, G7 governments conducted coordinated intervention in foreign exchange markets to weaken a very strong US dollar. In 2011, G7 policy makers, once again, synchronized their forex interventions, this time to prevent the Japanese yen from rising too much after the Fukushima disaster triggered a repatriation of funds into Japan.