The Global Currency War Begins

Desperate to tame inflation, central bankers are vying for more buying power

- Amelia Pollard and Saleha Mohsin

The European Central Bank’s Isabel Schnabel started it. In February she flashed a chart showing how much the euro had weakened against the US dollar. Two months later, the Bank of Canada’s Tiff Macklem bemoaned the decline of the Canadian dollar. Swiss National Bank President Thomas Jordan suggested he’d like to see a stronger franc.

The US dollar had been soaring—now up 7% for the year—as the Federal Reserve prepared to aggressively combat inflation. And so one by one, central bankers elsewhere, just as desperate to tame the relentless march of inflation in their own backyards, began sending not-so-subtle signals that they would for once welcome a stronger currency—which helps reduce the cost of imports by boosting buying power abroad. It’s a form of intervention so rare that their jawboning alone moved markets. On June 16, two of them upped the ante: Switzerland surprised traders with the first rate increase since 2007, sending the franc soaring to its highest level in seven years. Hours later, the Bank of England announced its own rate increase and signaled bigger hikes to come.

The value of currencies has emerged as an ever-larger part of the inflation equation. Goldman Sachs Group Inc. economist Michael Cahill says he can’t recall a time when the central banks of developed nations have ever targeted stronger currencies so aggressively. The foreign exchange world is calling it the “reverse currency war”— because, for more than a decade, countries sought the opposite. A weaker currency meant domestic companies could sell goods abroad at more competitive prices, aiding economic growth. But with the cost of everything from fuel to food to appliances soaring, strengthening buying power has suddenly become more important.