With the dollar trading at multi-year highs against a slew of other currencies — it hit a nine-year peak against the euro last week — many experts have sounded the alarm of a currency war.
Financial commentator Mike Newton, a former macro trader for Caxton Associates and global head of emerging market FX strategy for HSBC, is one of them.
"Policymakers in Asia and Europe are already devaluing their currencies, apparently driven by the failure of low interest rates to stimulate investment and by the recognition that the U.S. is the only place that is showing real growth," he writes in
The Wall Street Journal.
"Making their exports cheaper, they believe, will help their economies grow. The problem is that if every country devalues its currency, no one wins. And if devaluations become more aggressive and disorderly, it could create great systemic risks worldwide."
What's the solution? "The situation demands policy coordination," just like the global currency agreements of 1985 (the Plaza Accord) and 1987 (the Louvre Accord), Newton notes.
"The world may ultimately be heading toward a global managed exchange rate regime. This may sound far-fetched, but policymakers have already fixed the price of government bonds in the aftermath of the 2008 global financial crisis. Why should they stop there?" he asks.
"And if they don’t do something, then the disorder that potentially lies ahead in foreign-exchange markets could spark major systemic problems and undo much of the healing that has taken place since 2008."
Satyajit Das, a former banker and author of "Extreme Money," sees other dangers too. "Global financial markets face serious economic and non-economic risks that are above and beyond the challenges seen in 2008," he writes in an article for
MarketWatch.
So what's the problem?
"Social stresses are increasing. High levels of unemployment have persisted, despite economic recovery in many countries," he says.
"Some older or less-skilled workers face a bleak future, with no real prospect of ever returning to the work force. Youth unemployment is also high, creating a real risk of a lost generation — especially in Europe."
For those lucky enough to have jobs, "income levels are stagnant or falling, and working conditions are deteriorating"
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