The Currency War

A common feature of the four global currency wars since the 20th century is the competition of “devaluation of currency (increasing exchange rate).” As the gold standard system was virtually abolished immediately after the Great Depression, countries like the United States intervened in the foreign exchange market and focused on enhancing export competitiveness by lowering the value of their currencies. The same was true after the declaration ending gold convertibility in 1971 (Nixon’s shock) and the global financial crisis of 2008. Even in the Plaza Accord in 1985, lowering the dollar’s value against the yen was a key issue.

Since the beginning of the year, the pattern of this currency war, which has existed since World War II, has changed. Goldman Sachs, an American investment bank, analyzed in February that a new phenomenon is emerging in which central banks of each country are self-valuing their currencies to offset inflation-induced prices. This is the so-called “reverse currency war.”

The United States has pulled the trigger. Surprised by record inflation, it has raised interest rates three times this year. Following the “Big Step” (a 0.5% increase in the benchmark interest rate) in May, the Federal Reserve took the “Giant Step” of raising it 0.75% all at once in June. The possibility of an “Ultra Step” (a 1% increase) was also predicted in July. This is the most aggressive increase in the last 30 years.

Other central banks are also being pushed to raise their interest rates. They have already reluctantly had to raise rates, as the price of imports rose due to a strengthened dollar and supply chain instability. According to the Financial Times, central banks in 55 countries raised interest rates by 0.5% 62 times in three months since April and 17 times in July alone. This is the most paroxysmal rate hike since the 2000s.

The future is more of a problem. International Monetary Fund Managing Director Kristalina Georgieva said yesterday that high prices will not begin to cool down until next year. Japan, China and the European Union, which have not yet joined the others with interest rate hikes due to the possibility of an economic contraction, are likely to make a fifth currency war a reality.

The stabilization of the exchange rate is essential for the stable operation of the government’s policies, as well as for the prices of goods and services for the working class and business activities. Korea has also raised interest rates five times since August of last year, but the won-dollar exchange rate is on an upward trend. U.S. Treasury Secretary Janet Yellen is visiting Korea today. We hope that practical exchange rate stabilization measures, such as the Korea-U.S. currency swap agreement, will emerge from this meeting.