The Currency War Is Over! Long Live the Currency War!

More
If you're reading this, congratulations. You survived the Great Currency War of 2007-12.

What? You didn't realize there was a currency war? Well, there was. At least if you listened to Brazil. The gist was that countries would competitively devalue their currencies to try to get a trade advantage over their rivals. There's nothing wrong with doing this during a global slump -- it's how recovery started during the Great Depression -- but there is a tremendous risk. That risk is that a currency war will beget a trade war. In other words, countries won't just print money to get an edge; they'll put up trade barriers instead.

But the biggest currency imbalance looks to be mostly over. Alan Beattie of The Financial Times recently pointed out that China's currency, the renminbi, is looking much, much less undervalued nowadays. The Peterson Institute pins it as 7.7 percent undervalued against the dollar in 2012 versus 28.5 percent in 2011. That's partly due to China's higher inflation, but mostly due to China's trade surplus falling quite rapidly.

The chart below compares The Economist's famed Big Mac index from July 2012 and July 2007, and tells much the same story. It estimates how over-or-undervalued a currency is based on -- yes -- Big Mac prices. The RMB is still undervalued, but much less so.

BigMacIndex.png

Three other big takeaways from this chart. First, the euro has dropped a considerable amount the past five years, but likely has to drop a good deal further if the common currency wants to keep being a currency. Second, the global crisis hasn't done the yen any favors. And third, Japan might want to emulate Switzerland, which has pegged its currency to the euro to prevent it from becoming off-the-charts overvalued.

The Great Currency War of 2007-12 might be over, but unless the global economy suddenly takes off, The Greater Currency War of 2013 might take off.
Jump to comments
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

Get Today's Top Stories in Your Inbox (preview)

Tracing Sriracha's Origin to a Seaside Town in Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Where the Wild Things Go

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Adults Need Playtime Too

When was the last time you played your favorite childhood game?

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In