Conspiracy theories have run amok. After several years of claiming countries were engaged in currency wars, or attempts to drive their currencies down to achieve export advantage, many reporters and analysts announced a volte-face. At the late February G20 meeting in Shanghai, a secret accord has been concocted that declares a truce in this made up war.  

The main idea had been that a rising dollar and falling currencies had become destabilizing. Officials recognizing this changed tact. The ECB and BOJ, for example, would not seek to weaken their currencies, and the Federal Reserve, for its part, would take its foot off the monetary brake that it had tapped on at the end of last year. 

There are two main problems with this popular narrative. The theory and the facts. 

It is true that the floating exchange rate regime lends its self to abuse. Countries can pursue beggar-thy-neighbor policies that steal the aggregate demand of another country by directly seeking currency devaluation to boost exports.  

Yet the claims of a currency war are misplaced. What is misunderstood goes right to the heart of global governance issues.  

There has been an arms control agreement in the foreign exchange. At both the G7 and G20 levels, there has been an endorsement that foreign exchange prices are best left to the markets, except in unusual circumstances. The agreement is enforced like other arms control agreements. Trust but verify.  

When a country ventures too close to violation, it is called out. Recall, that as Japanese Prime Minister Abe was campaigning in late 2012, he and other Japanese politicians were perceived as attempting to manipulate the yen’s value too directly and were chastened by the other G7 members. A new pledge was demanded that committed the Abe government to the arms control agreement. 

The US Treasury Department also acts as a monitor. Required by Congress, the US Treasury provides semi-annual updates of the international economy and the foreign exchange market. It has been more than a decade since it accused any country of manipulating the foreign exchange market.