Barry Eichengreen, a well-regarded economist and frequent commentator on global currency issues, published a report in January joining the conversation about whether bond buying and other expansionary monetary tools are “beggar-thy-neighbor” if they’re designed with the intention of stimulating domestic demand – even if currency devaluation is a by-product (which it is).
The G7 countries also addressed the issue (sort of) at an informal gathering last weekend. The Financial Times reported: “Participants reaffirmed their commitment not to use economic policy to seek weaker currencies and did not conclude Japan was breaking that pact yet.” With respect to currency movement specifically, the only thing the G7 has agreed to in the past few years is that currency movement should not be too erratic. So it would seem that the G7’s position is that a 10% quarterly movement (in this case, yen devaluation) is not too erratic.
From my perspective, it doesn’t really matter whether competitive devaluation is the driver or a by-product of monetary policies: for global corporates, the effect is the same. Take a U.S.-based multinational corporation; the effects of global competitive devaluation include:
1) Loss of global competitiveness – Assume that a U.S. company competes with companies in Japan. When the Japanese yen depreciates relative to the dollar, then the Japanese companies’ products are less expensive in global markets than the U.S. company’s products – and the U.S. company’s products are thus less competitive.
2) Revenue losses – Assume that the U.S. company sells into Sweden and conducts those transactions in Swedish krona. The company signed a contract one month ago to sell 10 widgets for 10 Swedish krona, which at the time was equivalent to 1.6 U.S. dollars. Because the krona has depreciated, 10 krona are now equivalent to just 1.5 U.S. dollars. So the company has a 6% FX loss on that transaction.
3) Increased difficulty planning – Global competitive devaluation, currency wars, of the kind going on right now creates a lot of volatility in the currency markets. Combined with the fact that corporations are doing business in more places than ever, increased volatility makes trying to stay ahead of currency fluctuations essentially a game of whack-a-mole.
There are ways that companies can manage these impacts. When a company has accurate, timely, and complete insight into its currency exposures, then it can manage those exposures, so that at the end of the day the company isn’t impacted at all by global currency wars.