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
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral