Some commentators have suggested that QE3 is a sign of the U.S. engaging in a currency war. While I am sympathetic to this view because several central banks around the world have taken steps that could devalue their currency, I think it is unfair and inaccurate to dub this a “currency war.” It is even more unfair to claim that the U.S. has in some way “started” a currency war.
In the past few months, the ECB, Bank of Japan, Bank of England and People’s Bank of China have all taken steps to stimulate their respective economies. Each of these steps could be seen as an attempt to devalue their currency to boost exports. In the case of China, and to a lesser extent Japan, that is not an unrealistic conclusion. However, for the net importing economies, that is an odd conclusion to draw.
As for the Fed, QE3 definitely counts as stimulus and can be seen as an effort to devalue the dollar, but it hasn’t really worked yet. The dollar is still within a couple percent of its year-to-date high against most trading peers. So, either the Fed is losing the currency war or the United States is not in one.
As I noted in my commentary after the September FOMC meeting, the Fed has simply shifted its objectives. To some extent, they had no choice but to shift toward an easing policy to keep pace with a number of trading partners taking similar measures. If the Fed didn’t act, it would be hard to maintain a domestic manufacturing sector with a dollar persistently rising in value. This would make employment growth a real challenge and weaken equity markets. However, the more reasonable way to view QE3 is still fundamentally as stimulus. One could question whether this stimulus is necessary or effective or if stimulating lending might have been a more fruitful policy direction, but to label it as the start of a currency war is hyperbolic if not wholly inaccurate.