Rarely have the stakes for a Group of Seven summit been so sky-high and the expectations for success so deep in the mud.
Even the agenda for the June 26-28 confab in the Bavarian Alps suggests the G-7’s worldview is currently a million miles wide and one inch deep. Look, it’s grand that the host, Chancellor Olaf Scholz of Germany, has put together a multifaceted program for the leaders of key industrialized democracies.
Few can quibble with discussions on helping Ukraine and additional Russian sanctions. Topics from climate change to food security to gender equality are very worthy of focus.
But the G-7’s best shot for impact and relevance on June 29, the day after the summit, is something almost completely absent from the pre-summit conversation: a grand deal on currencies.
Granted, foreign-exchange issues tend to be handled a bit lower down the political food chain, by finance ministers and central bank heads. But to leave Germany without some kind of cooperation pact on currency moves—or at a minimum, rules-of-the-road for the rest of 2022—would remind world markets why they’ve come to ignore the G-7.
The strong dollar has become a crisis in slow motion for Asia. The Japanese yen’s 17%-plus drop this year has bond vigilantes bidding up yields on the government with the most crushing debt load. The Chinese yuan’s more than 5% decline since Jan. 1 leaves Asia’s biggest economy at risk of importing an inflation surge as growth is flatlining.
In fact, the dollar’s brawl is sparking what’s being called a “reverse currency war.” Normally when such brawls break out in Asia it’s governments engaging in a race to the bottom, all scrambling to weaken exchange rates to boost exports. Today, officials are trying to strengthen currencies to curb inflation risks.
The thing about geopolitical tensions over currencies is that they tend to be a proxy for something else. In the case of Donald Trump’s presidency, Washington’s assault on China was, well, personal. Dating back to the 1980s, one can find myriad video clips of then-businessman Trump complaining about big bad Japan supposedly stealing U.S. jobs. Over the last decade, Trump merely substituted “China” as the economic boogeyman.
Today’s discord, though, reflects economic dynamics and incentives out of whack. Even as America’s national debt tops $30 trillion, Washington politics is all but paralyzed and inflation is at 40-year highs, investors can’t buy dollars fast enough. Efforts by China, Russia and Saudi Arabia to cut the dollar out of global trade and commerce only increased the dollar’s appeal.
The crypto crowd is demoralized to find that plans for Bitcoin, Ethereum, Ripple and others to replace the dollar are flopping. The epic volatility of crypto assets is fueling a bull market in nostalgia for holding old-school dollars, euros, yen and pounds and other fiat currencies.
Trouble is, dollar rallies that go too far often destabilize other economics. This happens when it acts more like a giant magnetic forcefield pulling most of the globe’s capital its way than a straight-up reserve currency. The more currency trading becomes a zero-sum game, the worse off the global financial system becomes.
What’s needed is a 2022 version of the famed “Plaza Accord” 37 years ago. That 1985 episode occurred when the G7 was the Group of Five. It was at New York’s storied Plaza Hotel that Britain, France, Germany, Japan and the U.S. agreed to a depreciation of the dollar relative to the yen and the German Deutsche mark.
To be sure, a grand scheme on that scale seems quite a reach nowadays. Also, China, whose yuan is central to any discussion of exchange rates, isn’t even at the G7 table in the days ahead. But few gestures might restore a dose of trust in global institutions than some agreement on common exchange rate objectives.
Case in point: the U.S. agreeing to intervene in currency markets with Japan. Though the Bank of Japan and Ministry of Finance deny it, it’s clear that Tokyo has lost control over the yen. The more Tokyo officials stay on the sidelines, the more 150 yen to the dollar is inevitable (it’s now 135).
“China would not want this devaluing of currencies to threaten their economy,” former Goldman Sachs economist Jim O’Neill told Bloomberg recently. “If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the 1997 Asian financial crisis are perfectly obvious.”
In Germany in the days ahead, President Joe Biden plans to roll out a global infrastructure framework to provide an alternative to China’s Belt and Road Initiative. Fair enough, but what about the sense in markets today that another global crisis might be afoot?
Consider that economist Nouriel Roubini, who called the 2008 Lehman Brothers crisis, is in the news warning about the broader implications of continued yen weakness. Or that hedge funds are increasing short positions on Japanese government bonds. Or that speculators are again testing Hong Kong’s peg to the U.S. dollar.
With a whiff of 1997 in the air, a dab of 2008-like fear on the horizon and Covid-traumatized governments in disarray, the G7 needs to be focused on taming markets that look increasingly out of whack. Since the Group of 20 is too unwieldy and feature too many conflicting priorities, the G7 is the only game in town. It’s time the group once again played to win for global stability—and regained its relevance to boot.