Currency war between US, China revealing growing global fissures

“We're in the midst of an international currency war, a generalized depreciation of currencies,” Brazilian Finance Minister Guido Mantega said in September.

The label caught on. It became shorthand to describe the emerging differences between the leaders of the largest economies that export a lot, like China, Germany and Japan; and those that would like to do more, such as the United States and eurozone countries.

The year's most important decision — by the Chinese central bank to allow the dollar-pegged yuan to float more freely — just before the Group of 20 summit in Toronto in June, had mixed results.

It did nothing to cool the rhetoric of U.S. lawmakers waging open warfare against Beijing's currency policy, which they say keeps the yuan undervalued to gain an unfair trade advantage that is siphoning away U.S. jobs.

“It is only strong legislation that will get the Chinese to change and will stop jobs and wealth from flowing out of America,” said Senator Chuck Schumer, a New York Democrat pushing legislation to slap trade sanctions on China.

China, from atop a 10 percent economic growth rate, protested foreign pressure.

“China's currency policy is coherent and responsible,” Chinese President Hu Jintao said.

If the yuan is allowed to rise sharply, “a large number of Chinese export enterprises will go bankrupt, the workers will lose their jobs ... making it hard for society to remain stable,” said Chinese Premier Wen Jiabao.

In nearly six months, the yuan has appreciated less than 2.5 percent against the dollar. The International Monetary Fund said it remains “very much undervalued.”

And with the dollar declining against most other currencies, the yuan has weakened against the euro by about three percent, and the yen by around five percent.

If there is indeed a currency war, Europeans and Japanese think they are the victims.

In the eurozone, countries that have not seen end of the recession, such as Greece and Ireland, are suffering as they share the euro with Germany, in robust expansion.

Unimaginable in 2009, debate on the breakup of the monetary union raged in 2010.

Tokyo, intervening in currency markets on Sep. 15 to stem the yen's rise, drew criticism that spared other countries that were much more interventionist.

For nearly 40 years the world has lived in cohabitation with currencies that float freely in the markets, and others that are managed by central banks.

But this dollar-based system appears to have reached its limit.

French economist Patrick Artus explained in his book “Uncontrollable Liquidity” that the monetary system was driving countries to create excessive amounts of money.

The United States, he wrote, enjoys the privilege of issuing “without a second thought” a currency for which demand seems insatiable.

Against that, central banks are forced to curb the appreciation of their currencies by buying dollars, reinvested in reserves, mainly U.S. Treasury bonds. And for that China issues yuans, Brazil reais, and South Korea the won.

This systems seems so unsustainable that the United States itself questions it.

“As currently constituted, the international monetary system has a structural flaw,” Ben Bernanke, chairman of the Federal Reserve, said in November.

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