Currency wars are breaking out to tackle rampant deflation that is crippling economies around the world.
It’s bit like a global game of pass the parcel as whoever is caught with the strongest currency inherits the economic problems of the country before them in the chain.
A currency war is about shifting the deflation in one country to another by weakening currency exchange rates.
Politicians and economists see this measure as a way of making their imports more expensive and stimulating their economies, while their exports are less expensive for other countries to buy.
“Nations exerting this policy are not rebalancing or growing their economies, they are passing their deflationary problems across the border for someone else to deal with,” said David Bloom, a currency expert for HSBC.
“They are not doing anyone a favour except themselves.”
Weaker currencies
Research by financial information group Bloomberg reveals the 10 currencies most likely to fall in value over the year are also those most affected by deflation.
Argentina heads the list, but is in a different position from the rest. The peso is in free fall after self-inflicting economic wounds by defaulting on debt and devaluation.
The biggest currencies expected to reduce in value are the Japanese yen and the Euro.
Central banks for both have indicated that they would like to see weaker currencies to help stop inflation sliding.
In Japan, inflation slipped to a 10-month low of 3.3% in August, the latest published figure.
The Eurozone inflation rate for August was 0.4% and the trend has been downward for most of this year.
Escaping deflation
The economic rot in the Eurozone bloc is now starting to affect neighbours and trading partners.
Exchange rates in Switzerland, Hungary, Denmark, the Czech Republic and Sweden are forecast to fall back around 6%.
The problem reaches every corner of the world – China, New Zealand and Australia rely heavily on exports and they are taking a battering in the currency wars, with more expensive exports affecting growth.
As a result, New Zealand has worked hard to devalue the currency to make exports more competitive. The Kiwi dollar has lost around 10% in value in less than a year.
Another economy trying to weaken is the Israeli Shekel. The Israeli economy plunged into deflation in 2007 and the government is deploying every economic weapon available to boost inflation and push down the price of the shekel.
