Thursday 19 Jul 2018 | 23:08 | SYDNEY
Thursday 19 Jul 2018 | 23:08 | SYDNEY

Currency conundrums


Mark Thirlwell

20 January 2010 15:15

Policy issues around exchange rates are shaping up to be a big theme in 2010. Here are three examples:
1. The long-running debate over China's exchange rate policy is going to heat up this year. As China's exporters continue to grab market share in a world where demand is much harder to come by than it used to be, there are a number of voices arguing that China's yuan policy is significantly distorting the international economic environment at a time when the world economy is still in a fragile state (mind you, plenty of others remain sceptical of what a change in the yuan would actually deliver).

While conventional wisdom has it that, the greater the external pressure for change, the less likely Beijing is to oblige, the fact that China is dealing with large capital inflows amid fears of an overheating economy means markets are re-thinking the probability of a yuan revaluation this year.

2. Last year saw a marked intensification of another old staple of international economic discussion, the future status of the US dollar as the world's reserve currency.

Several prominent economists, including Joseph Stiglitz and Fred Bergsten, suggested the days of a greenback-dominated international monetary system were over. Zhou Xiaochuan, Governor of the People's Bank of China, made his now famous suggestion for a greater role for the SDR. And, at their inaugural summit in Yekaterinburg, leaders of the four BRIC economies likewise called for a more diversified international system. 

While a dearth of compelling alternatives to the greenback means that a major international role for the US dollar is not going to disappear soon, this year is likely to see continued speculation about when that time might finally arrive. It will also bring an intensified focus on the features of our now evolving multiple-reserve currency system. 

Meanwhile, China's gradual moves to internationalize the yuan will continue to be an important link between these first two currency conundrums.

3. The current leading alternative to the dollar as candidate for global reserve currency is the euro. But the eurozone is experiencing tough times right now. 

My research trip to London last September saw virtual unanimity among my interlocutors that last year's talk of a eurozone breakup was wildly off the mark. But Greece's economic troubles are now once again providing sceptics with the a reason to doubt the long-term viability of Europe's single currency project, and prompting renewed discussion about the costs and benefits of any decision to exit from the eurozone. 

In this context, Paul DeGrauwe had an interesting piece in the Financial Times a few days ago, asking whether the ECB was repeating the policy mistakes of the 1930s by allowing the euro to become significantly overvalued. 

Of course, exchange rate issues are going to be prominent closer to home as well, with many analysts predicting that 2010 will be the year that sees a commodity-powered A$ reach parity with the greenback. 

Photo by Flickr user Holster, used under a Creative Commons license.