Since the US embarked on its zero interest rate policy in 2010 there have been hundreds of central bank interest rate adjustments around the world as countries have sought to bolster their economies via a lower exchange rate. This ‘tit-for-tat’ game has been called ‘the currency wars’ and has driven huge capital flows in the past 6 years. The US, China, most of Europe and Japan have all partaken in some form of currency manipulation and this week’s announcement by Singapore’s central bank of an explicit zero appreciation target for its exchange rate adds fuel to the fire.
The Monetary Authority of Singapore’s latest policy for adjusting its official interest rate is not targeted at unemployment or inflation but at the exchange rate itself. These are all linked of course; the US Fed’s near zero official rate was viewed as keeping the US dollar relatively weak for some years. However, the publicly-stated policy of the US central bank was aimed at providing US domestic markets with conditions which would be conducive to employment growth, with a weaker exchange rate a secondary effect. Singapore has been much less subtle. While the MAS stated its aim is not to weaken the exchange rate against other currencies, the fact it targets the exchange rate rather than inflation or domestic growth implies the policy is aimed at Singapore’s export competitiveness. It seems like a softer version of a currency peg.
A weaker currency for one country, by definition, means a stronger currency for others. Other countries, facing a higher exchange rate, have an incentive to weaken their currencies through lower interest rate settings and before you know it you have a race to the bottom. This happened among France, the UK and the US in the early 1930s and is seen as having deepened the Great Depression. Recent policies of the ECB, the Federal Reserve and the Bank of Japan have led to claims these large economies are privately positioning their currencies to be weakened in order to stimulate exports at the expense of other countries. At least in Singapore’s case, its economy is small and thus its exchange rate policies do not have the global effects of policies in Europe, the US or Japan. In Australia, the RBA is reluctant to cut rates to offset its appreciating currency and has even taken a subtle swipe at the policies of other central banks.