The case for an international common currency

The dollar gives America huge power, but the international monetary system built around it is sliding into chaos, as recent US support for the yen shows. Yet replacing the dollar brings risks of its own.

On 31 July the US Treasury intervened massively in the markets to support the Japanese yen. ‘Washington’s historic intervention to prop up another nation’s currency stunned investors,’ the Financial Times wrote soon after. There hadn’t been such an intervention in nearly 30 years, so it was a clear sign of something badly amiss in the international monetary system (IMS). But why did it happen?

There are two answers. The first stems from immediate circumstances. For several years the yen’s value has been steadily declining because of the differential between the interest rate set by the Bank of Japan (1%) and those of other states, the US in particular (where rates are currently 3.5-3.75%). That’s all the encouragement investors need since it’s so easy to borrow in a cheap currency, invest the funds in one that offers a higher return, and pocket the difference. This operation is known as a carry trade. Because the yen is particularly cheap to borrow, it has long been a favourite for such speculation, and this has exerted further downward pressure on it. The yen’s gradual slide has made Japan’s imports more expensive, particularly hydrocarbons.

Rising oil prices caused by the war in Iran, combined with the dollar going above 164 yen – a level not seen in 40 years – eventually forced Tokyo to act. Since Japan needed to buy back its own currency to prop up its value, the White House feared it might try to raise funds by selling some of its holdings of US government debt – Japan is the biggest foreign holder. Large-scale selling would have pushed up (already historically high) US interest rates, something Washington was determined to avoid: 30-year borrowing costs are at levels unseen in nearly two decades. So the US Treasury stepped in to buy yen, thereby taking the world into bizarre new territory.

The US intervention, which was followed by other similar manoeuvres (none of which are likely to have the desired effect), indicates, (…)

Full article: 2 119 words.

Renaud Lambert, Frédéric Lemaire & Julien Trévisan

Renaud Lambert is deputy editor of Le Monde diplomatique; Frédéric Lemaire is an economist and Julien Trévisan a mathematician.

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