His view was not unique and many businessmen at the time shared his belief. Unfortunately, we did not have sufficient leverage, and political forces won over economics, as they often do. In the event, the rupee exchange rate was fixed at Rs 13.33 to the pound sterling, which rate held till 1966, when the rupee was first devalued (to Rs 21 to the pound sterling).
This, to my mind, was a real currency war. There was definitive disagreement as to the “fair” exchange rate and one side, because it had control, was able to compel the other to accept an exchange rate that was not reasonable from its domestic standpoint. Importantly, this was in an era of fixed exchange rates.
Today, in the era of floating exchange rates, it is the market that has enormous power and is the key player in the game, particularly when no country, including the US, has the kind of control that Britain had over its colonies. Of course, the US still has a kind of hegemony in financial matters as the US dollar is (still) the currency of choice in global markets. As a result, the US monetary policy is more than first among equals. Given that it has been loose as a goose over the past several years, most currencies have strengthened more than they should, threatening many countries’ competitiveness, leading to the outcry over the “currency wars”.
In reality, there is no currency war, as that story from the past explains. Rather, each country is simply trying to manage its domestic circumstances as best it can — as, indeed, the G20 has just acknowledged.
In any event, the market (or circumstances) always fixes things one way or another before they get out of hand. Recall, for instance, how six or seven years ago, when the dollar was falling like a stone – the dollar against the yen fell from 90 in early 2006 to below 80 by mid-2007 – the rhetoric in markets was all about whether the euro would replace the dollar, how Iran was planning to invoice its oil sales in euros, and so on. By 2008 or so, the European sovereign crisis hit and all such talks changed. Again, through 2011 and 2012, all anyone could talk about was when – not if – the euro would break up; today, that talk is, at least for now, history.
So, too, once the dollar strengthens materially, all current muttering about currency wars will end. There is already considerable evidence pointing in that direction. I saw a survey recently that listed Tokyo, Osaka, Sydney and Melbourne as the four most expensive cities in the world. Tokyo and Osaka were hardly surprising, but Melbourne? The survey vindicated my belief, from as far back as February 2011, when the dollar fell below one Aussie, that the dollar had fallen much too far.
The wheel has already started turning, with the yen down by more than 20 per cent since its all-time high set about a year ago. The Aussie is also showing some signs of following suit — I have to go to a wedding in Melbourne at the end of the year, so I am sure the Aussie will be way below US$1 by then.
Again, gold, another key indicator of dollar weakness or strength, is becoming very edgy. Its volatility is at its lowest level in over 18 months indicating that, if nothing else, gold volatility is going up. Technically, too, gold is looking weak – it has fallen below $1,620 an ounce – so, we could see the big move, in gold and, perhaps the dollar soon.
Coming back home, the rupee volatility has been declining despite the thin market imposed by the Reserve Bank of India. However, any upsurge in global volatility would certainly upset this tentative calm and make risk management even more difficult — be very careful.
jamal@mecklai.com