Outlook: Currency instability

MERVYN KING, Governor of the Bank of England, has set himself a new challenge. Having largely succeeded in a lifetime's ambition to make domestic monetary policy predictable and boring, thus depriving columnists like me of what used to be a staple diet of surprises and cock-ups, Mr King wants to do the same to the international monetary stage, which with its vast trade imbalances and sometimes violent currency corrections, he thinks of as far too excitable for its own good.

Speaking at Gordon Brown's mini-Davos in London yesterday, Mr King drew attention to the line in The Importance of Being Earnest in which Cecily is instructed by her tutor to read her political economy. "The chapter on the fall of the rupee you may omit", she says, "It is somewhat too sensational". The travails of the currency markets were also the title of a chapter in Bernstein and Woodward's classic account of Watergate when an official stumbles into the Oval Office to say; "Mr President Sir, we have a lira crisis on our hands". The President's ineloquent reply was "F*** the lira".

The present occupant, George W Bush, seems to adopt very much the same view about the dollar and America's burgeoning budget and current account deficits. He just doesn't seem to care that the euro has appreciated by some 50 per cent against the dollar over the last three years and the yen by 20 per cent, or if he does, he's certainly not showing it. If it helps American growth, he seems positively to welcome it.

Yet others are very concerned indeed. Junichi Ujiie, chairman of the Japanese investment bank Nomura, gave this chilling analysis to the World Economic Forum in Switzerland last week. If China allows the renminbi to float against the yen this year, and it appreciates by say 10 per cent, then reasonable Japanese economic growth of 2 per cent plus is assured. If on the other hand China does nothing, the present dollar peg remains, and the yen appreciates a further 20 per cent against the dollar, then there will be no growth at all in Japan and the economy might even plunge back into recession.

So will China move to a more flexible exchange rate system any time soon, possibly by pegging to a basket of different currencies rather than just the dollar? Yes we will eventually, said Li Ruogu, deputy governor of the People's Bank of China at the same meeting, but in our own time. China will not be told when to do it, there is no timetable and the belief that Chinese intransigence is causing global trade imbalances is just plain wrong.

There is some merit in what he says. Only 10 per cent of Chinese trade is with the US, so getting rid of the peg and allowing the currency to appreciate might not have the severe effect on Chinese exports and growth everyone assumes. However, there are other distortions that are caused by the peg too. One is that it forces China to adopt the same monetary policy as the US, with very low interest rates and the economy awash with liquidity. The appropriateness of these policies for such a high growth economy are open to question. General price inflation seems to have been brought under control in China, but other symptoms of severe overheating abound. Property bubbles in Shanghai and many other cities in China make our own housing boom look like a vicar's tea party by comparison.

And what does Mr King suggest for making the international system more boring? For starters, he thinks it no longer appropriate to have the dollar as the world's only reserve currency, especially when it is so indepted. This in itself creates severe imbalances, with the Far East effectively lending America the money it needs to keep buying Asia's goods. Furthermore, G7 needs to be broadened to include non Japan Asia, in particular China and India. On both fronts there are signs that things are moving in the right direction. The G7 will eventually become the G12 - it almost was in London yesterday, with representatives from China, India, Brazil and South Africa as active as the main G7 participants - and some central banks are increasing the euro constituent of their reserves at the expense of the dollar.

But fortunately for us scribblers Mr King is still a long way from making the currency markets boring. We can expect a good few crises yet before the international system becomes as stable and predictable as domestic monetary policy.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living