As central banks around the world are driving down the value of their currencies, a global currency war may be brewing and the euro might be the next to join the fight.
The currency devaluations may be unintentional side effects of central bank monetary policies, but they make their country's exports cheaper and help improve their national economies.
The Japanese Central Bank, urged on by the country's new government, announced it would start an aggressive inflationary stimulus. The Federal Reserve has already been purchasing huge amounts of Treasurys through its ongoing quantitative easing efforts. In the United Kingdom, the government has semi-officially approved of the sterling's weakness, according to the Financial Times.
Editor's Note: This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser
After putting fears of a eurozone breakup behind it, the euro has risen more than 25 percent against the yen and 10 percent against the dollar since late July.
Jean-Claude Juncker, Luxembourg's prime minister and outgoing president of the Euro Group, warned that the euro was "dangerously high," the Times reported.
European Central Bank (ECB) President Mario Draghi could talk the euro down in "open mouth operations," according to the Times. If that's not enough, the ECB could lower interest rates even more.
Since the ECB's deposit rate for overnight deposits is already zero, the central might have to offer negative interest rates, in other words charge banks for holding their funds.
Draghi's current intention is as yet unclear. He recently said the euro's exchange rate was in line with its long-term average, indicating he was not worried about its rise, according to the Times. Yet his past behavior — his statement that the ECB would "do whatever it takes" to save the euro — indicates he can do what's needed.
Jens Weidmann, president of Germany's Bundesbank, in a speech in Frankfurt this week warned of a growing risk of currency wars, saying central banks are losing their political independence. Japan and Hungary, he said, are already seeing significant political interference.
As central banks devalue their currencies in an effort to boost exports, they could unleash a worldwide inflationary spiral, he said.
Editor's Note: This ‘Third War’ Will Be the Most Destructive in History, Warns Pentagon Adviser
© 2013 Moneynews. All rights reserved.