Race to the bottom with G4 currency rhetoric

Reuters ^ | March 10, 2010 | Mike Dolan

[Cheap_Hessian]

(Reuters) - With economic policy stimuli already at full tilt, no government wants an overvalued exchange rate to slay recovery, and the rival "soft currency" needs are producing some elaborate rhetorical jousting.

The problem is that major exchange rates -- at least those between the developed G4 economies of the United States, euro zone, Japan and Britain -- are largely market determined and difficult to control.

There's no magic wand to conjure up devaluation and the monetary and fiscal levers that could possibly engineer a free-floating depreciation are near exhausted.

G4 interest rates remain near zero. New money and liquidity taps have been switched to gushing. And soaring government debts show how much has been spent on fiscal boosts or bank bailouts.

With these orthodox policy switches close to maximum power, keeping currencies competitive in the scramble for scarce export markets is the next trick and a more subtle approach is needed.

Short of direct open-market intervention -- already being conducted by the Swiss and considered by Japan -- all that's left to policymakers is nuancing of speeches and market suasion.

But nudging markets can be a dangerous game, not least because there's a risk of panicking foreign creditors at a time of ballooning national debts.