In periods of prolonged economic pain international cooperation gives way to an every-nation-for-itself attitude. This manifests itself in protectionist measures, specifically competitive devaluations that are seen as a way to spur exports and to retard imports.
Trouble is, if all nations devalue their currencies at the same time, foreign trade is disrupted and economic growth is depressed.
A country can intervene directly in markets by selling its own currency as a way to reduce its value or stop it from getting stronger. For example, in November, South Korea’s central bank sold won to buy at least $1 billion in foreign currencies to contain the steep gain in its currency.
Decreasing the value of a currency is much easier than supporting it. When a country wants to depress its own currency, it can create and sell unlimited quantities. In contrast, if it wants to support its own money, it needs to sell the limited quantities of other currencies it holds, or borrow from other central banks.
“Central banks around the world are printing money, supporting their economies and increasing exports,” Abe said recently. “America is the prime example. If it goes on like this, the yen will inevitably strengthen. It’s vital to resist this.”
It seems clear, however, that the Federal Reserve’s objective is to spur U.S. economic growth and increase job creation, not to depreciate the dollar. Furthermore, Treasuries and the dollar are the ultimate havens, regardless of Fed policy.
