FEATURE: POLITICS
gained more than others. No such comfort THE POLITICS OF INTERVENTION
in the currency markets – they are a zero- Co-ordinated policy intervention can happen only where there is
sum game. A currency investor’s gain is a suffi ciently large, cross-border alignment of interests. Th e last
another’s loss, a currency advantage for major round of intervention occurred in September 2002
exporters represents a disadvantage for (incidentally, it marked the euro’s weakest point versus the dollar)
importers and a country’s competitiveness and it occurred, because on one side the European Central Bank
can improve, but only at the expense of was anxious over the infl ationary consequences of a weakening
another’s. euro and snowballing expectations of further weakness, and on
Equally true is that a country cannot the other side, in the year of mid-term Congressional elections,
devalue or revalue its way to prosperity. the falling competitiveness of American manufacturers had
Currency trends and decisions do not make become a critical issue in the battleground states of Michigan and
the economic cake larger or smaller, but it Pennsylvania.
can infl uence who gets the biggest slice – Cast your mind back and recall that the massive overshoot
and that gets political. Th e value of of the yen in 1994-95 drove Japan from recession into a
currencies is heavily infl uenced by political decade of depression. Th e yen’s jump appreciation, initially,
pressures. Young traders like to dismiss went against the fundamentals – if they last long enough, all
central bank meetings as irrelevant get- currency moves become self-fulfi lling. Th e economy was weak,
togethers of incompetent old fogeys, but in equity markets were collapsing, interest rates were falling
the process they miss the point – that policy towards zero and on all measures of price competitiveness, the
makers have diff erent objectives from yen was already overvalued. But the market got it into its head
traders, and that they often survive longer. that the US authorities were using a weak dollar to beat the
Policy matters. Indeed, the ‘fundamentals’ Japanese into opening up their markets. It was a dollar
or even traders do not pick turning points: devaluation policy and if a country wants to devalue its
the tops and bottoms of the major dollar currency there is precious little others can do about it. In the
exchange rates are marked by co-ordinated US, carmakers, who represent a small proportion of the GDP
policy intervention. but a large proportion of infl uence, insisted that the only
reason why the Japanese did not buy American cars was
because of unfair trade practices and they had to be forced to
EXECUTIVE SUMMARY open up with the stick of a weak dollar. Th e yen was driven by
US domestic politics and if you held on to a fundamental view
• Foreign exchange is the most political of all
fi nancial instruments as the value of currencies
of currencies you would have been murdered in 1995, and
is heavily infl uenced by political pressures.
many were. Forget the fact that for the Japanese, US cars had
• The performance of the yen, the US dollar and
the steering wheel on the wrong side and were too big and
China’s remnimbi demonstrate how currency
poorly built. All the currency weakness in the world has not
movements are affected by political
saved General Motors, Ford and Chrysler.
machinations.
Th e Chinese were similarly forced into appreciating their
• It would be far better if Switzerland, the ECB or
currency in 2005. Th e idea that global imbalances were caused
China ran the world’s reserve currency – rather
by China’s manipulation of its currency is the most ridiculous
than the dollar – because they have the
idea, based on bad economics, but politics sustained it, and
demographics for it.
political pressure forced the Chinese to abandon an anchor of
stability that had served them well.

“The idea that global imbalances were caused by China’s
manipulation of its currency is the most ridiculous idea, based
on bad economics, but politics sustained it”
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 37
36-3836-38 political markets.indd 37political markets.indd 37 1/6/091/6/09 11:58:4811:58:48Professional Investor Summer 09.39 39 4/6/09 15:41:00
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