World View: Strengthened Euro Currency Raises Fears of 'Currency Wars'

This morning's key headlines from

  • Quantitative easing in U.S., Japan raises concerns of 'currency wars'
  • Strengthened euro currency raises tensions
  • Hugo Chávez devalues Venezuela's bolivar currency by 32%

Quantitative easing in U.S., Japan raises concerns of 'currency wars'

Venezuela's bolivar currency was devalued by 32%
Venezuela's bolivar currency was devalued by 32%

Many historians believe that America's 1931 Smoot-Hawley Tariff Law, designed to "save American jobs" by making it expensive to import previously cheap goods from other countries, like Germany or Japan. Instead of saving American jobs, the law triggered retaliatory tariff wars around the world, dramatically reducing the amount of world trade between countries, actually costing jobs.

Today's politicians are very well aware of what happened in the 1930s, and, except for a few skirmishes, have avoided imposing trade tariffs during the current financial crisis. However, human nature being what it is, there's concern that countries are trying to do the same thing in a different way, by devaluing their currencies. A central bank does this by "turning on the printing presses" and using techniques such as quantitative easing to make more money available. If one country does this, then its currency will become cheaper relative to the currencies of other countries, and this will improve exports, since that country's manufactured goods will be cheaper in other countries. For example, America's Federal Reserve has been flooding the markets with $85 billion per month in new "printed" money, and plans to continue doing so for a while. Japan's central bank has said that it plans to do something similar. Of course, if all countries devalue their currencies, then you have "currency wars," and no one benefits. Bloomberg

Strengthened euro currency raises tensions

Talk of "currency wars" has been increasing because the euro currency is gaining strength against other currencies. On Monday, the value of a euro rose to $1.34, when it was close to $1.20 not too many months ago. This is making European exports extremely expensive in America, while making American exports cheap in Europe. It's also splitting the euro zone countries down the middle, along the same lines as the split over bailing out Greece and Spain. France and the southern countries want the European Central Bank (ECB) to "print" a lot more money to bail out countries that need it, devaluing the euro currency at the same time. But Germany, the Netherlands, Austria and Luxembourg and opposed to bigger bailouts and also to devaluing the euro. Reuters

Hugo Chávez devalues Venezuela's bolivar currency by 32%

Venezuela's President Hugo Chávez, who is recovering from cancer surgery in Havana, ordered his government to weaken the exchange rate for the bolivar currency to 6.3 bolivars per dollar from 4.3 bolivars per dollar. This is the fifth devaluation in nine years, and it follows a spending spree last year that helped Chávez win reelection, but also tripled the fiscal deficit and increased inflation.

The devaluation, which was announced on Friday and is effective on Wednesday, is already having dramatic effects. Venezuelans experienced panic buying of televisions and airline tickets over the weekend, and also stocked up on groceries for fear that inflation-based food price increases. The weaker exchange rate will give the central government an additional 84.5 billion bolivars ($13.4 billion) in revenue, mostly from oil sales done in dollars. On the other hand, foreign companies that sell products in Venezuela can expect a sharp decline in earnings, when their sales in bolivars are converted back to dollars. This includes a wide range of companies, including Avon Products, Coca-Cola, and Mexico-based Gruma SAB, the world's largest tortilla maker. Analysts said that while the latest devaluation was expected and necessary, it still did not bring the official exchange rate anywhere close to the black market, meaning yet another round of devaluations was likely before long. Bloomberg and Reuters

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