Fears of a currency war

by Donny Kendal, Staff Writer

With central banks around the world pursuing easing money policies, some market analysts see a potential beginning to a full-out currency war.

Fears of a currency war have grown from the recent announcement by the new prime minister of Japan that the yen will be allowed to significantly devalue in order to stimulate exports. So far, the Yen has lost 15 percent of its value against the U.S. dollar and the Euro in recent months. This devaluation encourages countries to buy from Japan, boosting Japanese exports at the expense of other exporting countries.

So far, however, there is no evidence of direct action by Japan to devalue the yen. An analyst from Goldman Sachs, Kamakshya Trivedi, said Japan is just conducting monetary easing in order to give their domestic economy a lift.

“I find really excessive any language referring to currency wars,” said European Central Bank President Mario Draghi. Others are less confident and worried about what may result.

Marc Chandler, a strategist at Brown Brothers Harriman and Co. said that countries believe their currency is “too important to be left to the markets.”  This idea leads policy makers to intervene and manipulate the currencies. Author and financier, James Rickards, feel that these policies could cause destabilization and much higher inflation.

Steps have already been taken to prevent a currency war. During a recent G20 summit in Moscow, the group of nations pledged to keep competitive devaluation in check. The group agreed that excessive devaluation could undermine the global economic recovery.

Accusations that a country is starting a currency war are not completely uncommon.   Brazil accused U.S of initiating a currency war in 2010 after the U.S. began its second round of bond buying under the quantitative easing policy. These heated claims eventually died down.

Currency markets are complex and interdependent. Because of this, the potential of a currency war is uncertain. What is sure is that all eyes will be on Japan to see whether they continue to devalue the yen.