The World Trade Organization is sounding alarm over “currency wars” which pose the biggest threat to global economy. A statement to that effect was published on Thursday in a special report ahead of a G20 summit in Seoul next week.
WTO experts say that even though the G20 countries are successfully resisting the temptation of resorting to protectionism in trade, many are induced to do so because of unemployment and tension on the currency markets. In their words, the so-called “dark clouds” on the global financial market pose the main threat to economic recovery, since the “fallout” from these “clouds” may prove so overwhelming that it will sweep transitional and developing economies.
The IMF’s chief economist Olivier Blanchard acknowledged that as he commented on the “financial downpour” which broke out after the US Central Bank started to print more money again on Wednesday to boost unsecured monetary stock by 600 billion dollars. This should stimulate a fast currency influx into developing economies whose currencies are bound to rise in value. Given the situation, speculative investments are certain to create new hurdles and extra currency weakening measures are imminent.
Many countries with developing markets from Brazil to South Korea have reacted by threatening measures to prevent dollar influxes which inflate their currency rates and may also inflate prices.
The bickering between the United States and China over currency rates threatens to spill over a two-on-two conflict. Brazil plans to suggest a special currency manipulation index to spot countries that keep their currency rates at a low level to increase the competitiveness of their economies. For today, the Brazilian real is the leader in the growth of its exchange rate against the dollar.
The war between the yuan and the dollar may result in a revamp of segments on the world currency market. Sergei Luzianin, the Deputy Director of the Institute of the Far East, comments.
Who will win – the yuan or the dollar – has yet to be seen. The Chinese leadership is set on de-dollarizing the world financial system and making the yuan a world or regional currency directly or in stages.
Many tend to opt for payments in regional or national currencies as a way to financial recovery. The ruble has de facto received the status of regional currency on the post-Soviet space. Latin America’s countries that form the Southern Common Market are clearing their territories of the dollar in favor of national currencies. Brazil, Russia, India and China, which form the BRIC group, have resolved to rely on their national currencies in trade and investment cooperation.
Whether this could be the answer to the incipient “currency wars” will become clear during a G20 summit in Seoul.