Looming Currency War between U.S., Japan and EU

A series of warnings have been issued concerning a looming worldwide depression, putting the three major economic powers, the United States, Japan and the EU on alert. Preventing a global depression, however, will not come easy. It is hard to further lower interest rates or boost government spending. Interest rates in those countries have already hit bottom, and budget deficits are still a lingering threat. Therefore, developed countries have resorted to the last option: adjustment of exchange rates. Some analysts are saying that an "exchange rate war" has already started in anticipation of the G8 summit scheduled for early next month.

"Weak dollar" policy of U.S.

A weak dollar has sparked confusion on the world economy. The U.S. economy has been reeling from snowballing deficits, with the Iraq war having added to the pressure. U.S. Treasury Secretary John Snow hinted that the U.S. government would continue to tolerate depreciation in the value of the dollar.

By the end of last month, the dollar held at 120 against the yen. Beginning this month however, the value began to plummet rapidly. The dollar-yen exchange rate dropped to 115 on Thursday in Tokyo, forcing the Bank of Japan to buy 4-6 billion dollars, in a vain attempt to deter the fall.

The United States and Japan entered into an agreement in 1985 under which the two countries consented to a strong dollar and weak yen. The Clinton administration, refused to let the dollar weaken in any respect. Instead, it took various measures to boost the value of the dollar. In 2001, when the Bush administration took office, it also maintained a strong dollar policy. With elections looming however, President Bush decided to lower the value of the dollar in an attempt to boost U.S. exports to other countries.

Looming crisis

Japan has made great strides in lifting its sagging domestic economy, though with the value of the yen increasing, the country will lose its export advantage, which could lead to less corporate profitability and less investment in equipment. The chain reaction caused by the currency shifts will pose greater difficulties in inching away from economic slowdown. The Japanese government announced that its economy experienced 0% development and a negative increase in consumer prices for the first quarter. Most Japanese consumers believe that prices will drop further, and are spending less money, putting added "depression pressure" on their economy.

European economic powers like Germany, Italy and the Netherlands are suffering from negative development this year as well. Germany, a leader in the European economy as a whole, recorded 0.2% development in the first quarter of this year, and continues its downward trend for the sixth month in a row. Even worse for the European economy, the value of the euro has shot up by 25% in the past year, severely limiting exports from European companies.

The New York Times, citing a Morgan Stanley analyst, warned that the world economy might also decline. It pointed out that factors include the sluggish economy in the U.S., a country which has in the past led world economic development, the outbreak of SARS in Asia and the slowing European economy.

Growing signs of exchange rate war

The United States stated that it would not interfere in the currency market, and Japan and the EU took it as a signal of the coming era for a weak dollar. Now, the latter are racking their brains to come up with a solid plan to lower the value of their currencies. Japanese economists believe that the increase in the strength of the yen stems from non-economic factors, since Japan has been in a recession for a long time.

The Wall Street Journal reported that the currency issue would dominate the G8 Summit to be held Friday in France. Washington announced that the G8 would be focused on ways to jump-start the sluggish world economy, with attempts to avoid discussion on the weak dollar at the talks.

The Central Bank of Europe has been considering an interest rate increase some time this month based on vehement demand from European companies. It is believed that the widening "interest rate" gap between Europe and the U.S. has attracted international investors, and raised euro`s value.

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