International currencies have become a contentious subject during the past year. For much of the last 50 years the American dollar has been the primary global reserve currency. Only recently did the euro take its place alongside the dollar as a global reserve – the dollar is the number one currency by volume, but the euro is the number one by total value.
After the collapse of financial and monetary structures in the United States, and to a slightly lesser degree in Europe, many now look to Asia for leadership. The “Asian Tigers” of the 1990s are growing again, led by a relative newcomer; the Peoples’ Republic of China.
An article published by The Economist on September 30, details the monetary situation in several leading Asian economies. South Korea, Japan, and China have predicated their economic growth on creating and maintaining a currency “peg” against the United States. The national currencies are devalued in order to boost exports, and drive economic growth.
This tactic has worked magnificently well in building up export-led economies. However, China cannot maintain export dominance and simultaneously build up a wealthy middle class similar to the developed world.
As The Economist points out, if China hopes to see its currency used more as an international reserve it must allow the value to rise against the dollar, euro and others. This will lead to a decline in exports, and perhaps derail some of the growth to which the Peoples’ Republic has become accustomed.
China has already seen its exports to the United States cut in half by a recession-led decrease in consumption. It can ill-afford further reductions which would result from a stronger yuan driving up the price of Chinese goods.
As China deals with the question of whether or not to allow its currency to strengthen – a choice which will forsake one set of goals for another – Japan must deal with a very similar problem. After rising out of the Asian Economic Crisis during the 1990s Japan slowly allowed its currency to strengthen against the dollar.
In fact, from July 2005 to July 2008 the Japanese yen rose 21 percent against the dollar. In the 14 months since most of those gains have been erased. The yen’s drop has severely undercut citizen purchasing power as the economy took a large step back. Japan’s new government has a major decision; they can either allow the currency to fall and boost exports, or support a “strong yen” policy to help individuals.