Currency wars and QE3

Guido Mantega, the finance minister of Brazil, has announced again that the monetary policies of the major G7 central banks has created a currency war. He coined the term "currency wars" after the Fed introduced QE2. He is again seeing the same signs. He stated that QE3 will "only have a marginal benefit in the US as there is already no lack of liquidity ... and that liquidity is not going into production."

Minister Mantega believes that the monetary expansions of the dollar will drive its value lower at the expense of the emerging markets. A cheaper dollar will boost US exports and manufacturing employment. We have always thought that this is a side benefits desired by the Fed. In response to QE3, we are now seeing easing in Japan. The QE program has been in place for sterling and the ECB will flood the market with liquidity. All of this has been to help G7 countries. The impact will be felt by emerging markets countries who have had to buy dollar for their foreign exchange reserves. Brazil and other emerging market countries do not want to see their currencies rise and lose their export gains. 

So currency wars are what it is being called, but if everyone is providing liquidity the marginal benefit for any one country is limited as currency rates stay the same on a relative basis. Unfortunately, this relative price only stays the same if EM central banks continue to buy more dollars. This cannot be sustained forever!