Avoid devaluing currencies to boost trade

NEW DELHI: The United States will “oppose and push back very hard” against attempts to boost exports by weakening exchange rates, Treasury Secretary Jacob J. Lew said in one of his strongest statements yet on a potential currency war.

“It would be a very big mistake for the world to get into a situation where I think there is kind of a race to devalue,” Lew said in an interview with India’s NDTV television channel.

He said there was a “very big difference” between countries that use tools like quantitative easing to boost domestic growth and those that weakened currencies to gain an “unfair trade advantage.”

Lew’s comment was in response to a question on reports that China is considering measures that would weaken the yuan, and comes just days after Group of 20 finance chiefs pledged to avoid devaluation to spur expansion. Divergences in global growth rates and monetary policies are strengthening the US dollar and eating into earnings of companies such as Pfizer Inc.

More than a dozen interest-rate cuts since the year began, as well as the Bank of Japan and European Central Bank’s embrace of bond buying, have fanned speculation among investors that some economies are seeking to boost growth and inflation by encouraging weaker exchange rates.

China is said to be considering widening the band under which the yuan is allowed to fluctuate, or gradually guiding the exchange rate lower by adjusting the fixing against the greenback, as deflation risks bolster the case for a stimulus.

A cheaper currency tends to boost a nation’s exports while making import prices more expensive, often to the detriment of trade partners. The concern is that those losing out then retaliate, tripping off a round of devaluations which end up damaging the world economy in a cycle reminiscent of the 1930s trade war. — Reuters

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