China's devaluation fires cannon in global currency war
By Jamie McGeever
LONDON Aug 11 (Reuters) - The global currency war entered a new and critical phase on Tuesday as China's surprise devaluation threatened to unleash a wave of competitive devaluations and keep monetary policy around the world looser for longer - perhaps even forcing the U.S. Federal Reserve to delay or slow its expected rate rise cycle.
'Currency wars', a phrase used by Brazil's former finance minister Guido Mantega in 2010 to describe how competing countries explicitly or implicitly weaken their exchange rates to boost exports and gain trade advantage, have intensified in recent years.
As interest rates have fallen to zero and below in many developed economies, money printing has proliferated and exchange rates have become one of the few remaining levers to stimulate business activity and, in some cases, avoid deflation.
The European Central Bank's move to quantitative easing in March, for example, was widely seen as a way for the euro zone to weaken what was seen as an overvalued euro and prevent a deflationary spiral in many of its heavily indebted countries.
The Bank of Japan's latest wave of QE was also designed to weaken the yen.
Against that backdrop, China's tight peg to an appreciating dollar meant the yuan's real trade-weighted exchange rate had climbed more than 10 percent over the past year, even as its economy slowed and exports slumped.
But the near-2 percent devaluation of the yuan on Tuesday suggested Beijing had had enough, and was willing to risk toppling another row of regional dominoes and opening up fresh trade tensions with the United States.