"Intervention in foreign exchange markets in order to gain a competitive advantage is unacceptable," proclaims US Treasury Secretary Jack Lew in a strongly worded statement today with regard America's position in the global economy. That we note this comment is only relevant as, despite the apparent "stability" of the Chinese Yuan against the USD, relative to the 13-currency-basket with which China primarily trades, the Yuan has collapsed to 17-month lows - with JPY and EUR appearing to bear the brunt of the pain.
The US Dollar has traded within a relatively "stable" band against the offshore Yuan for much of the last six weeks...
But when compared to the collapse of the Yuan "basket" - as PBOC devalued against the rest of the major trading partners - the 'stealth' devaluation is obvious...
Is it any wonder that JPY is surging - despite all of Kuroda's best jawboning efforts?
As Lew's statement notes,
As other countries gain greater voice in the international system, they also must accept greater responsibilities. A major one is to engage in responsible foreign exchange practices. Currency fluctuations are a normal and even desirable attribute of the global economy. When the values of currencies are allowed to move according to market forces, the global economy can better adapt to changes in relative economic performance among countries. What is unacceptable, however, is intervention in foreign exchange markets in order to gain a competitive advantage in trade or impede adjustments in the balance of payments.
Competitive devaluation represents a beggar-thy-neighbor fight for a shrinking global pie, not a pathway to stronger global growth.
Strong multilateral institutions such as the IMF and the G-20 are important vehicles for reinforcing norms against predatory currency practices and for mobilizing multilateral pressure against countries that engage in them. At the G-20 meeting in Shanghai this February, members not only committed to using all tools of policy—monetary, fiscal, and structural—to boost economic growth in a time of weak demand. They also committed to refrain from competitive devaluation and, for the first time, to consult on foreign exchange markets to avoid surprises that could threaten global financial stability.
So the question is - Is it ok to "devalue" your currency against other non-reserve-status currencies? As long as the veil of "stability" is maintained against The USD?