Currency War Questions Could Cloud Trade Agreements

At the World Economic Forum in Davos, Goldman Sachs Group Inc. GS President Gary Cohn complained that the world is in the midst of a currency war.

According to Mr. Cohn, “The prevailing view is that the easy way to stimulate economic growth is to have a low currency.”

Over the past few days, central banks in Denmark, Canada, Switzerland and most notably, Europe, have made significant moves in order to ease their monetary policies.

While policymakers argue that central bank easing was necessary in order to promote growth and combat inflation, critics claim that weakening their nations’ currencies to make exports more competitive was the real motivation.

The term “currency war” has been around since 2010 when the U.S. Federal Reserve began its massive bond buying scheme, which in turn devalued the dollar.

Last year, the Bank of Japan followed suit with a similar quantitative easing scheme and this year the European Central Bank added its own stimulus package.

Large movements within the currency market have created issues for the Obama administration when it comes to creating trade agreements.

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Labor unions and U.S. manufacturers are calling for the White House to include currency manipulation rules in its trade agreements, but Obama has said the place for disputes over currency issues is at international forums like the IMF or the Group of 20 through the U.S. Treasury Department.

Currently, the Obama administration is working to create a Trans-Pacific trade partnership that will connect the U.S. with 11 Pacific countries, including Japan.

However, the deal will likely struggle in congress as many lawmakers are pushing to include rules that will keep those nations from intervening in their currency markets and skewing the partnership in their favor.