Currency manipulation


China is being widely accused of manipulating its currency for the benefit of domestic exporters. Despite the ostensibly diplomatic stance Obama is taking on the issue, it is clear that many in Congress and the Treasury are not happy about what they see as behaviour that apparently costs US jobs.

But doesn’t the concept of currency manipulation imply some ‘natural’ currency value? Surely to manipulate this value requires an original level to have existed, free from government interference. The point may sound hair-splittingly philosophical, but I certainly think it is interesting.

Just consider that by virtue of existing at all, governments will be having an effect on currency values. Everything a government or central bank does should have some effect on relative currency values; budget deficits (i.e. USA, UK and Euro) and interest rates are a few examples.

The accusation of currency manipulation, then, is a slightly strange, not to mention hypocritical, one. Recall that the USA has deliberately weakened its relative currency value in two previous recessions in order to expand exports. I don’t think it is clear that the current Chinese actions are significantly different.

It seems that the line between ‘legitimate economic policy’ and ‘currency manipulation’ is a thin one, if existent at all. The US should remember that this issue is full of grey areas before it makes any official accusations.