The
term gets tossed around a lot, but the meaning and consequences of a
"currency war" aren't intuitively clear to most people. Especially
confusing is the idea that you lose the war when your currency goes up. The
suddenly very strong dollar, for instance, should, one would think, be a good
thing, since it seems to imply that the rest of the world is impressed enough
to covet our currency.
That's
true in a sense, but in another sense -- and beyond a certain point -- it
becomes a potentially huge problem, because a strong currency makes exports
(priced in dollars) more expensive and therefore a tougher sell. Consider
today's headlines:
Commodities
rout slows Caterpillar
CHICAGO
(Reuters) - Caterpillar Inc on Tuesday reported lower quarterly net profit
that missed expectations as lower prices for copper, coal and iron ore hurt
mining equipment orders, and warned the recent fall in oil prices would make
for a difficult year in 2015. The report sent the company's shares down
nearly 6 percent in premarket trading.
Plunging
profits have sent shares of Microsoft tumbling
Microsoft
shares slid more than 7.6% in pre-market trading after second-quarter
earnings showing a dip in earnings. Microsoft reported earnings per share of
71 cents, meeting estimates but falling below the 78 cents reported during
the same quarter last year.
Procter & Gamble Profit Down 31%, Hurt by Exchange
Rates
Procter
& Gamble's second-quarter earnings sank 31 percent as the strong U.S.
dollar cut into the performance of the world's largest consumer products
maker.
The
Cincinnati company, which sells products ranging from Tide detergent to Crest
toothpaste, said Tuesday that exchange rates will remain a challenge well
into fiscal 2015, especially in the second half of its year. Overall, it
expects foreign exchange to chop its core, fiscal 2015 earnings by 12 percent
and reduce its revenue by 5 percent.
And why
should we care about falling corporate profits?
Wall
Street tumbles with Microsoft, Caterpillar; data weighs
NEW
YORK (Reuters) - U.S. stocks fell sharply on Tuesday, with Microsoft and
Caterpillar shares tumbling after quarterly results, while an unexpected
decline in durable goods orders also weighed on sentiment.
Many
multinational companies have posted disappointing results and forecasts, with
the stronger dollar a common culprit.
Adding
to earnings concerns, a gauge of U.S. business investment plans unexpectedly
fell in December, a potential sign that slowing global growth and falling
crude oil prices were starting to have an impact on the economy.
So this
is what it means to lose a currency war: plunging corporate profits, falling
stock prices, a slowing economy, rising layoffs. Then, when the reality of a
weaker economy reaches Main Street, angry voters, difficult elections, and regime
change. This last part is of course unacceptable to the people managing
economic policy and is why virtually no one can accept defeat in such a
conflict.
So...a
few more days like this and expect a parade of Fed, Treasury and
congressional talking heads to float the idea of cancelling those promised
interest rate hikes and, just maybe, returning into the good old days of QE
Infinity.
