Who are the winners and losers in the currency wars?

8th March 2013 by The Harried House Hunter

One of the features of the credit crunch era is that financial markets are meddled with and intervened in so much it is difficult to know what the “true” prices are. Of the main markets it is the currency ones that often give us the clearest clue I believe. This is not to say that there is no intervention here as for example the Swiss and their 1.20 cap versus the Euro prove that there is. Indeed you could argue that the creation of a currency zone such as the Euro is itself a type of intervention. But on the other side of the coin the enormous currency flows mean that even the largest attempts to intervene often fail. I worked in a merchant bank treasury department when the pound was forced out of the forerunner of the Euro called the ERM in 1992 and there was genuine shock at the Bank of England as what it considered to be large intervention was soaked up like a sponge. Also we have seen the Bank of Japan in the past try again and again to weaken the Yen and fail again and again.

The poor record of central banks in this area is a grim reminder of their fallibility and it is a constant source of surprise and bafflement to me that economists continue to persist with theories which have them as omnipresent and omniscient like some cartoon super-hero.

What is a winner and a loser?

Ordinarily it is assumed that the losers have currencies which are rising and the winners are those who have ones which are falling. Accordingly price competition will mean that the latter will see economic expansion and the former contraction as a result of the move meaning that like Hot Chocolate those with rising currencies will be singing.

So you win again, you win again

Here I stand again, the loser

This is the standard competitive devaluation model where the winners are perceived to be those who weaken their currencies. Except that the situation is far from that simple as for example my country the UK weakened its currency in 2007/08 by approximately a quarter  but even now around five years later the improvements have been patchy. The Governor of the Bank of England has made himself something of a laughing stock by the use of the phrase “rebalancing” to describe this when in fact the impact was minor. Let one of his colleagues at the Bank of England Martin Weale describe what actually happened in a speech last month.

the balance of trade measured in current prices is now not much better than it was in 2008.

However Martin Weale in this same speech demonstrated that he too spends some time in la-la land as he feels that benefits may still arise from the 2007/08 devaluation. Indeed having observed the Chancellor of the Exchequer also trying to talk down the pound only yesterday the British establishment seems to be ridden with this view. Perhaps they hope that Tom Petty was right.

Baby even the losers
Get lucky sometimes

Also we need to consider that for the UK the situation has changed because the 1992 devaluation when she was ejected from the ERM was one where her economy then boomed and she “won” whereas by 2007/08 things were different and she lost as output went nowhere and inflation became an issue.

Okay so are the losers in fact winners?

If we move to the other side of the coin we see that some economies seem to have avoided the economic weakness that you might think would have been caused by the rise in their currency. For example whilst Japan had problems because of the rise of the Yen she in fact did surprisingly well when you consider that against the US Dollar she went from 110 Yen in the middle of 2008 to the mid-70s in 2011. So we see that perhaps the anti-inflationary effect of the currency rise helped to insulate her although it is also true that many Japanese exporters moved production elsewhere. As the Swiss Franc surged we also saw that whilst there were effects observable her economy maintained a forward momentum and grew overall. Of course unlike a test in a laboratory we have nothing to compare it too but whilst there were losses for these two it is not clear that they outright lost. If you compare them with the UK you can argue that Switzerland has performed better in spite what would be regarded as a strong currency disadvantage.

So we are left with the view that some production is price competitive but some is much less so and demand for it is what is called price inelastic. On this subject I have long thought that the whole concept of a demand curve as demonstrated by textbooks is misleading as from the limited number of points on the graph we can actually draw we simply do not have enough information to assume that. The UK’s experience proves that.

Is the Euro a winner or a loser then?

As we observe one of the largest efforts at currency manipulation in recent times the creation of a currency bloc incorporating much of Europe called the Euro there are many ways of looking at this. Firstly it was rather odd that the President of the European Central Bank quoted this from the recent G-20 meeting.

We reiterate our commitments to move more rapidly towards more market-determined exchange rate systems and exchange rate flexibility

Odd don’t you think as he owes his job to a system (the Euro) which relies on exactly the reverse? However he did point something out with which I can agree and I have put a bracket around the dodgy bit.

The nominal (and real) effective exchange rates continue to be in line with their long-term averages

The nominal effective or trade-weighted exchange rate for the Euro is virtually exactly at its 1999 or opening level (100.38 to be precise). I think we immediately learn something which is that some countries can cope with this much better than others. JP Morgan recently put it another way when it analysed what exchange rate various Euro countries needed versus the US Dollar and its estimates varied from 1.07 to 1.49. I will let you figure out the two extremes with one clue which is that they start with the same letter of the alphabet.

If we now look at recent events where the Euro has risen from 94.4 on the index quoted above since late July last year we can analyse the likely effects. It is quite possible that the German economic locomotive will power on with little effect but places where exports are price competitive are likely to see a hit. We know that the peripheral countries are much more likely to be affected by this and we also know this undermines the internal devaluations (wage cuts to you and I but hopefully also some increased productivity) that are Euro area policy for them.

But there is a catch which is illustrated by Germany. If there are no gains from a cheaper currency for a country like her why did she join the Euro. I am afraid that out of the goodness of her heart does not cut it for me! So she saw a gain in an exchange rate taking a lower path meaning that even she feels that there is a limit to how much of an appreciation she can take. Also there is the counterpoint which is that the others were implicitly accepting a higher exchange rate which I guess right now more than a few are ruing. I do not think we will lie awake at night wondering where the Drachma,Escudo,Lire or Peseta would be now relative to the Euro.

What about right here, right now?

Japan and the Yen

As I type this the Yen is plummeting again and has fallen to 95.5 Yen to the US Dollar. Indeed its fall has been so sharp it has even been falling in 2013 against the overwise weak pound which is now at 143.6 Yen. But so far the record of what has been the initial plank of the Japanese economic plan or Abenomics has disappointed somewhat. I am not discussing output or trade figures as their response will take time but the February inflation figures showed another fall. When you consider that the spot price of a barrel of Brent crude has risen by 10% in 2013 so far then an impact should be happening although again it may take time.

But what we will see is a battleground between price competition and a build-up of inflationary pressure. For all the analysis as important as anything was described by Kylie Minogue with her first hit.

I should be so lucky

Lucky lucky lucky

As for example a fall in the oil price and other commodities would come in nicely right now for this strategy.

The UK

Recently we have lost at this game as our tendency to inflation eroded any competitive gains. Frankly if we try it again I expect us to lose again.

The United States

For all the talk of currency debasement and monetary debasement such as the QE to infinity programme (85 billion US Dollars a month) the US Dollar has been rising recently. The trade-weighted dollar index (1997=100) is at 100.83 and is a couple of percentage points up on the beginning of February. So if the US authorities wish to reduce the value of the US Dollar they have work to do.


So there you have it. In my view the common concepts of winners and losers from conventional economic theory are as misleading as much of the rest of it has turned out to be. You have to look more deeply into  individual economic circumstances to see whether a currency fall is good or not. Also it is clear that if some is good more may not be! You also need more than a soupcon of luck!

Also I note with a wry smile that as we churn around the subject of currencies and possible wars that both the US Dollar and Euro are close to unchanged on their nominal averages! Oh well you might say but of course there are plenty of other factors too such as inflation and productivity differences.


13 thoughts on “Who are the winners and losers in the currency wars?”

  1. Jan says:

    I’m not an economist so this may not be very relevant but doesn’t a strong currency attract money to a country and doesn’t this help that countriy’s economy or is this effect so small that it doesn’t affect the disadvantage of a strong currency to the country’s export market?

    1. Anonymous says:

      Hi Jan

      You are right to identify this as international capital flows are enormous these days. In fact you could argue that the size of them is one of the problems that we face as they can be destabilising when they move. For example the “carry trade” swamped trade flows in both Japan and Switzerland and drove their currencies down initially but up later.

      The problem is that currency flows to a strong currency these days are often fleeing from someone and arrive in an unstable rush for example Euro area money into the Swiss Franc. But on the other side a country with a weak currency can attract money in as we are seeing with the foreign property purchases in London.

      But of course what investors mostly want to know is not what is happening now but what will happen next…

  2. pavlaki says:

    It would appear that the biggest problem for the UK economy is the Euro zone and it’s lack of growth which translates into no export orders here. My contacts in Euroland all indicate that price is no longer an attraction to buy from the UK as their businesses are retrenching or in a siege situation. Whilst a small snapshot, if this is indicative of the rest of the Euro zone then our policy of dropping Sterling is not going to work as far as Euroland is concerned. If they persist with their Frankenstein currency union in it’s present form, then we are likely to be faced with this problem for many years to come. As for my exports from the Eurozone – they are finished. Killed off by the high value of the Euro. Unfortunately we endure a situation of poor export performance and high inflation as a consequence of the Bank’s Sterling policy. Low interest rates hit savers (who are the spenders who could boost the UK economy) and as they cut back on discretionary spending, we have stagnation. What worked in the 90’s isn’t going to work this time round as all economies are flat(ish).

    1. Anonymous says:

      Hi pavlaki

      Yes we in the UK need to look further afield. It is a shame that such thoughts have got tied up in the “little Englander” debate. Many European countries are our friends but that does not mean that they have to be the epi centre of everything we do. Our political class have made a dreadful error in the way that they have associated wealth and advancement for themselves (via EU jobs) and the UK’s economic future.

      1. Anonymous says:

        Latvia seems to have the same problem. The political leaders are likely to be rewarded with euro jobs for taking Latvia into the euro, whilst the Latvian taxpayers pick up ESM liabilities

  3. forbin says:

    Hello Shaun

    Currency wars help ? no one in the long run

    For me? well they give the UK a bad does on inflation for awhile but as all other countries engage then the effect wears off

    in the meantime my wages fall , my costs increase , my savings decimated

    will I be able to afford the popcorn going forward ?

    we don’t export much and import a lot – so you would have thought a strong currency would be better for us ?


  4. Alex says:

    “Also I note with a wry smile that as we churn around the subject of
    currencies and possible wars that both the US Dollar and Euro are close
    to unchanged on their nominal averages! Oh well you might say but of
    course there are plenty of other factors too such as inflation and
    productivity differences.”

    I can put away my tin hat then? :)

    So how is this panning out then? if the currencies are close to unchanged then I must be not seeing or missing something given the amount of devaluation that has been going on – or is it – that everyone else is doing the same thing in the end we are all equal only paying more physical Euro’s or Dollar for stuff?

    The would mean our devaluation is only the same as everyone else’s so no nett gain for us or anyone else, we are all just treading water in a pond that is getting deeper and while we are afloat it doesn’t matter how deep the water is.

    The war theme can only stand on the context of changing currencies, more specifically the introduction of ‘new’ and the removal of usury, although as I think about it, Galterei took Argentina to war over the Falklands when the economy collapsed as detailed in yesterday’s comments. So a collapse can lead to war, but from Zimbabwe a collapsing economy did not. Therefore a choice of leadership.

    This brings us to the Third Reich and the introduction of the Reich mark, and as this was not based on debt at issuance, perhaps that indicates motives for the holocaust, and how Germany went from bust of hyperinflation in the late 1920’s to become a highly prosperous manufacturing country resulting in just 10 years from utter bust to most technologically advanced manufacturing, technology and weaponised country there was. The significance of this change in a ten year period cannot be overlooked for it is a formidable change in circumstances when considered again our 2008 crash, and here just five years later, our leaders have achieved absolutely no progress. I find Germany’s ‘lost decade’ between the late 1920’s and 1939 a fascinating topic.

    More recently we have Saddam Hussein who was authorised by I think it was the UN to trade oil for Euros, no longer supporting the US Dollar in oil trade, and within the year Iran was invaded by the US. The first Gulf War was because Saddam had invaded Saudi, the second was because of his change in currency dealings.

    Even more recently, Qaddafi instigated the gold back Dinar to trade against oil no longer using the devaluing [but your findings don’t support it being other than nominal – or am I missing it here?], and within a short time Nato lead by France instigates its humanitarian bombings and Qaddafi is dead. Indeed it was our William Hauge who announced with a still warm Qaddafi corpse that a band of rebels were now acknowledge to be in control of Libya and the first thing Hauge did was to set up a new central bank with money I believe he sent over there.

    Now we have Iran who is trading Gold for Oil. Is this by choice or because of the sanctions imposed on them have locked them out of the banking process..I recall this was announced on the BBC news some years ago now, but the turn of events, their timings will be important.

    China and Russia are buying up Gold, and China’s Yuan is going to Gold backed.

    [see http://countdowntozerotime.org/2013/01/29/wgc-confirms-china-launching-gold-backed-yuan/

    So perhaps this explains why Syria is an on going crisis that we’ve not dropped limb ripping humanitarian bombs on its population because of the sensitive interests of Iran and Russia behind it. Further Israel may act as the proxy for the US to kick off an Iran war, solving the Syria issue, but creating possibly a bigger issue with Russia and China, but paving the way to finally deal with Iran putting US troops as the proxy operator of their oil as they have done in Libya and Iraq. No doubt this series of events will unsettle the current economic malaise giving the excuse that our policies would have worked, after all everything was ‘on track’ [that old chestnut of an expression], but for this war no one saw coming…like the crash of 2008. Yeah right.

    On a non war footing, Chavez of Venezuela has passed away, perhaps under his own steam, but who knows, maybe not, who has been a thorn in the US side ever since he’s been in power because he won’t play their game. Again with a still warm corpse, his number 2,[no pun intended] jumps on a plane to Washington DC to start creating deals with the US. What does Venezuela export?

    Still with China now instigating a gold back currency it will have challenges for the US Dollar and their devalued currency and perhaps that’s why the administration there is buying millions of rounds of ammunition that doesn’t fit military grade weapons. Its going to be a problem for 300 million people to buy food with a worthless currency unless its value can be upheld from the barrel of a gun, backed by oil for the world markets.

    Still there might not be anything in it anyway. Maybe it does ‘all just happen’ :)

    At the beginning of what turned out to be rather lengthy comment, I did ask about how the devaluation is panning out if the nominal values are pegging out to have little change… :)

    1. Anonymous says:

      Hi Alex

      I’ll add enough which is that the pound at around US $1.50 is at its average for the last 30 odd years! What I was trying to illustrate was that in many places whilst there are changes for a while in the end it is a zero sum game.

      However there can be drops as to get to our average against the US Dollar we have fallen 8.4% in 2013. Also there is Venezuela where the currency was reduced from 4.29 to 6.29 versus the US Dollar in January which gives a bit of food for thought for the Chavez love-in currently taking place I think…

  5. Richard says:

    You mention Germany, Shaun, but surely Germany is precisely an example of benefiting from a strong currency, not engaging in competitive devaluation. Looking at it over the long term – which the Germans tend to do, more than we Brits I suspect – the exchange rate was about DM12 to the pound in the 50s, declining to about DM8 in 1970. Later it hung around at DM 4 for a while, then 3 in the ERM – and just a bit less than that for a quite a while in the 2000s, i.e. nearly €1.50. Now, though, it’s €1.15, so about DM2.30 to the pound. So, good old sterling has been “competitively devalued” all that time. Yet which country has been the world’s biggest exporter? How does this fit in with all those pushing to trash their own currencies?

    1. pavlaki says:

      Good comment! There’s no substitute for making good quality products that the world wants. Oddly enough, in Asia the more a Merc costs, the more desirable it is and the more they sell! I’ll never forget the marketing lesson I had in Asia in the early 80’s when the marketing manager for a brand of scotch with a black label said that her strategy to increase sales dramatically was to double the consumer price! And it worked!! Quality will sell almost no matter what the price.

    2. Anonymous says:

      Hi Richard

      I completely agree. What I was trying to add was some nuance with the some may work but that does not mean more will. By this I mean that by joining the Euro the Germanic plan may have been to engineer yes a strong currency just not as strong as the Dm would have been.

      For example imagine the safe haven flows into a German Mark over the Euro area crisis if it existed. It would have shot upwards and whilst sales of many German products have price inelasticity the size of the move would have to have an impact.

  6. HarryA says:

    Who are the winners and losers in the currency wars?

    If we agree that struggling economies are all engaging in the same (non)devaluation, surely the winners are those that hold alternative (non-paper) currencies?

    Is it correct that China does not disclose how much physical gold she is purchasing?


  7. David Lilley says:


    I agree that artificial currency manipulation is a zero sum gain.

    I can remember Japan, several years ago, buying billions of $ to weaken the Yen and aid its exports and thinking “you cannot buck the market”.

    Shortly after Abernomics was introduced Japan had to rethink when imports exceeded exports. They hadn’t thought it through as you have. Abe wanted to win the election and return to power after three years of absence. Abernomics gave him an 87% majority and all the minority parties on side. The electorate obviously thought that the party that had been in power for 47 years and given them two lost decades could give them a new start.

    The US G20 spokesman said that Japan wasn’t a currency manipulator but needed to go with Abernomics for the sake of its economy. Why not the same attitude to China. Even when China increased the value of its currency by 25% the US continued to accuse them of currency manipulation?

    Back to 1992 and our exit from the ERM. George claims in “Soros on Soros” that he shorted a number of EU currencies culminating in the pound and then the Franc to attack the EU for doing nothing about the former Yugoslvia. We didn’t devalue following our exit from the ERM, the market ruled.

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