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World ‘Plunges Into Currency War’

Published: January 25, 2013
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Source: Money News

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Many government officials around the world are concerned that massive monetary easing in numerous nations is sparking a global currency war.

Governments from Germany, to Russia, to Brazil, to Thailand have expressed worry that the world is plunging into a currency war, Bloomberg Businessweek reports.

The current focus is on Japan, where the central bank this week announced it would increase its quantitative easing and also set a target of 2 percent for inflation.

Before the Bank of Japan even revealed its policy, Bundesbank President Jens Weidmann warned Japan against politicization of monetary policy that would lead to a weaker yen.”A consequence [of government pressure to ease], whether intended or not, could lead to an increasingly politicized exchange rate. Until now, the international monetary system has come through the crisis without a race to devaluation, and I really hope that it stays that way.”

Loosening monetary policy often depresses a currency by lowering interest rates and boosting inflation, thus making the currency less attractive to global investors.

Governments frequently pursue a weaker currency in times of economic stress to boost exports. But one country’s devaluation often begets another, raising fears of a currency war.

History gives reason for concern. A “beggar-thy-neighbor” policy of global currency devaluations helped spark the Great Depression that began in 1929.

Hedge fund icon George Soros, chairman of Soros Fund Management, certainly is worried. “I think the biggest danger is … a currency war,” he tells CNBC.

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