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News Release

Fighting the "Currency War"

November 8, 2010

WASHINGTON—More than a dozen countries, including some of the largest, have been intervening in the foreign exchange markets to weaken their currencies. This raises fears of "currency wars" like those that devastated the world economy in the 1930s. A new study by the Peterson Institute for International Economics distinguishes sharply between those countries whose intervention is justified, because their currencies are already stronger than called for by the economic fundamentals, and those who are violating their international obligation to avoid "competitive devaluation" because their exchange rates are now substantially undervalued.

The study updates the Institution's estimates of "fundamental equilibrium exchange rates" and concludes that the following major countries should be censured for their intervention policies because they are already undervalued by the amounts indicated (in percentages):

  Country Trade-Weighted Average Against Dollar*  
  China 17 20  
  Hong Kong 13 22  
  Malaysia 13 22  
  Singapore 29 33  
  Switzerland 5 0  
  Taiwan 9 17  
  *Misalignments against the dollar are calculated in a context in which all currencies are at equilibrium, not current conditions in which there are large undervaluations for China and other economies listed here.  

China's undervaluation has increased since it announced "greater flexibility" for its currency in June because its appreciation against the dollar has been more than offset by its depreciation against other currencies as it "rode the dollar down" against them.

On the other hand, several countries that have been intervening are doing so because their currencies are already overvalued by the indicated amounts or are very close to equilibrium:

  Country Trade-Weighted Average Against Dollar  
  Brazil 8 9  
  Indonesia* 1 –9  
  Israel 2 1  
  Japan 8 3  
  Korea* 2 –4  
  Thailand* 4 –2  
  Turkey 14 16  
  Philippines* 2 –5  
  *These countries are slightly overvalued on a trade-weighted average basis though modestly undervalued against the dollar under conditions of a general move to currency equilibrium levels.  

These distinctions have crucial implications for several major policy decisions that may be made over the coming days and months:

  • the G-20 summit in Seoul, in pursuit of its agreed rebalancing of the world economy to reduce excessive current account surpluses and deficits, may seek to limit currency interventions that impede achievement of that goal;
  • the US Congress, in considering legislation that would authorize trade sanctions against countries that deliberately undervalue their currencies, must take full account of the distinction; and
  • the US Treasury, in preparing its next Report to Congress on International Economic and Exchange Rate Policies and considering whether to designate countries as "manipulating" their currencies, must do so as well.
Neither the United States, the euro area, Canada nor the United Kingdom has intervened in the exchange markets. The new estimates suggest that all four are modestly overvalued on a trade-weighted basis: the dollar by 2 1/2 percent, the euro by 5 1/2 percent and the pound and the Canadian dollar by about 1 1/2 percent. The latter two are also slightly overvalued against the dollar with the euro most misaligned at about 5 1/2 percent. Australia and New Zealand, who also have refrained from intervening, have the two most overvalued currencies at about 20 and 25 percent, respectively.

William R. Cline and John Williamson, the authors of the new study Currency Wars?, argue that intervention is unjustified if a currency is substantially undervalued and a country is aggressively intervening to prevent appreciation. If instead the currency is already overvalued relative to its estimated equilibrium rate, "intervention to prevent further appreciation may be seen as benign and consistent with cooperative international behavior."

Table 2 of the study (attached here) categorizes the 30 countries studied against two metrics: the position of the currency vis-à-vis its equilibrium level and whether the country has been reported as intervening to affect the market level of its rate. Of the 17 economies that have reportedly been intervening, China and the five others listed in the initial table above fall into the category of "competitive undervaluation" while 11 are operating consistently with their international obligations. The authors conclude that "It is quite wrong to condemn countries for resisting appreciation irrespective of their situation. Any agreement at Seoul to prevent an exchange rate war should be based on a distinction between countries with overvalued and undervalued currencies, and should be designed to seek appreciation of the latter but not to debar the former from actions to prevent a further magnification of disequilibrium.

  Table 2 Country Categorization by Currency Under-(over-) valuation in October 2010 and Exchange Rate Intervention in Recent Months  
    Undervalued Approximate equilibrium Overvalued  
  Intervened to prevent appreciation China, Hong Kong1, Malaysia, Singapore, Switzerland, Taiwan Argentina, Indonesia, Israel, Korea, Philippines Brazil, India, Japan, South Africa, Thailand, Turkey  
  No apparent intervention   Canada, Mexico, Sweden, United Kingdom, United States Australia, Chile, Colombia, Czech Republic, euro area, Hungary, New Zealand, Poland  
  Intervened to prevent depreciation  

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About the Peterson Institute

The Peter G. Peterson Institute for International Economics is a private, non-profit, non-partisan research institution devoted to the study of international economic policy. Since 1981 the Institute has provided timely and objective analysis of, and concrete solutions to, a wide range of international economic problems. It is one of the very few economics think tanks that are widely regarded as "non-partisan" by the press and "neutral" by the US Congress, its research staff is cited by the quality media more than that of any other such institution, and it was selected as Top Think Tank in the World for 2008 in the first comprehensive survey of over 5,000 such institutions. Support is provided by a wide range of charitable foundations, private corporations and individual donors, and from earnings on the Institute's publications and capital fund. It moved into its award-winning new building in 2001, and celebrated its 25th anniversary in 2006 and adopted its new name at that time, having previously been the Institute for International Economics.


1. Because Hong Kong's currency board pegs the exchange rate to the dollar, and because Hong Kong has been running large current account surpluses, the economy is automatically considered to be in the category of intervention to prevent appreciation.