Currency wars: disturbances in currency markets have seen increasing calls for a de-pegging of Gulf currencies from the US dollar. But, with inconclusive results from the G20 conference in South Korea, the elusive 'basket of currencies' remains in the balance.

Author:Seymour, Richard
Position:Business: MARKETS
 
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THE BANKING CRISIS THAT TRIGGERED the global recession in 2008 has left the world's governments scrambling for ideas about how best to drive their individual economic recoveries. The inter-connected nature of the world's financial markets frequently means that self-interest can run contrary to what is good for everyone else--but it was ever thus.

Traditionally, advanced economies were happy to let their currency remain relatively strong. Weak currencies were for the economies of the developing world. However, in the aftermath of the banking collapse and with huge deficits, a lot of economies find themselves at the development stage all over again.

And this is where it can get nasty. Or at least Brazil's finance minister, Guido Mantega, thinks so. Prior to the October G20 meeting in South Korea, Mantega made his feelings clear when he declared that a 'currency war' was being waged on the world's financial markets. And he is not alone.

Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), has warned that using currency as a 'policy weapon' would put global economic recovery at risk.

Whether or not the world's currency markets can be said to be at war is arguable. What is not is that with no currency operating in isolation, international and domestic policies drive currencies up and down, which impacts on a broad spectrum of states across the world.

Consider the case of China, whose imminent return to dominance as the world's economic superpower--a position it held for centuries and only temporarily had to relinquish--is being driven by exports.

It is therefore in Beijing's interests to keep its currency, the yuan, low, making its exports cheaper. This is good for China, but represents a threat to the United States and Washington's plan to export its way out of its financial woes.

Until 2005, China pegged the value of its currency to the US dollar. In the three years to 2008, Beijing allowed the yuan to appreciate against the dollar, but since the global recession, has allowed it to float by no more than half a percent.

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Since then, the dollar has weakened greatly, taking the yuan with it; meanwhile, the value of certain other currencies has soared. For example, since March, Brazil's currency, the real, has increased in value against the yuan by more than 40% to become, according to the IMF, the world's most overvalued currency. When it is remembered that the Brazilian economy, itself a developing one, is also...

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