Will a Weak Pound Fuel the War?

02/28/2013 8:30 am EST

Focus: CURRENCY

Jim Jubak

Founder and Editor, JubakPicks.com

After the G20 meeting, most countries seemed to accept that Japan was a special case, but developments in the British Pound may change the rules entirely, says MoneyShow's Jim Jubak.

For the week ahead, let’s look at the newest event in the ongoing currency wars.

ou remember around the middle of February, when the G20 finance ministers were meeting in Moscow, the big question was: since Japan weakening the yen, is the G20 going to come out and condemn this? Are they going to say this is a bad thing? That countries shouldn’t devalue their currencies?

It turned out that the leaders of the G20 basically said pretty much nothing. The policy actually was incredibly convoluted: what they said is that as long as you’re using domestic policy tools to stimulate your domestic economy, and not specifically targeting your exchange rate, it was OK.

Now, how you figure out the difference between that and actually targeting your exchange rate, which seems to be what the Japanese are doing, is kind of hard to tell. What it really boiled down to was the G20 saying Japan can do whatever it wants as long as it doesn’t talk about it very much.

But Japan is kind of a special case. Everybody in the developed economies recognizes that Japan is kind of an ongoing depressed economy. It really needs to do something. It can’t get going. There is a tendency, I think, to cut the Japanese some extra slack because they've really got a big problem.

The newest event in the currency wars is coming out of the United Kingdom, where it looks like the new governor of the Bank of England—Mark Carney, who is out of the Bank of Canada, and he’ll be taking over sometime this spring—has been basically making noises about tolerating more inflation, maybe doing a program of quantitative easing...but steps that would definitely weaken the pound.

The pound, in fact, has been going down. It hit a seven-month low against the dollar on February 19, and is down even more—a 17-month low—against a trade-weighted basket of currencies. It has really had an effect. The sense is that the government and the Bank of England wants the currency to be looser because England is facing its third recession. It’s like a triple-dip recession. So again, it’s clear why they would want to do this.

The problem is there is not a whole lot of special-caseness about the United Kingdom. It’s not a country like Japan. It’s more like a country like France, or Italy, or Spain. If the UK does it, why not anybody else? I think that’s the big challenge coming up.

So I think the next real question in the currency wars is if England decides to do this, what’s the reaction? Because this is really just a step that says if the UK can do it, if the Bank of England can do it, anybody can do it. And then we’re off and running on competitive devaluation to see whose currency can be cheaper this week and therefore, drive up their economy and exports.

Related Reading:

The Euro: What Goes Up Must Come Down
The Bank of Canada Goes Soft
Tom Aspray: Currency Wars and Commodities