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Currency war: Who will be the casualties?

Central banks are in combat mode.

On the front lines: Europe, Denmark, Canada, Switzerland, Peru and India. Each of their central banks has taken unprecedented and dramatic action to ease policy and weaken their currencies in the past few days.

Central bankers may say they're ramping up the fight against worryingly low inflation, exacerbated by the dramatic plunge in oil prices. But the immediate, and perhaps most effective, impact of the easier monetary policy moves is being felt in the foreign exchange market.

"We are in currency wars," Goldman Sachs President and COO Gary Cohn told a panel discussion at the World Economic Forum in Davos, Switzerland. "The prevailing view is that the easy way to stimulate economic growth is to have a low currency."

An employee counts 50-euro banknotes at his desk inside a Travelex store, operated by Travelex Holdings in London.
Simon Dawson | Bloomberg | Getty Images
An employee counts 50-euro banknotes at his desk inside a Travelex store, operated by Travelex Holdings in London.

"Currency war" was a phrase coined by former Brazilian Finance Minister Guido Mantega in 2010 to complain about developed market central banks, such as the Federal Reserve, weakening their currencies through policies like quantitative easing.

Read MoreWhat ECB QE means for US policy, stocks: Strategist

In economics, it was always referred to as "competitive devaluations," when countries deliberately try to weaken their currencies to boost their country's exports and economic growth. The currency wars have defined post-financial crisis policies, as countries and central banks search for economic growth that's been lumpy and disappointing.

For instance, Mario Draghi on Thursday led the European Central Bank into completely uncharted territory, announcing it would buy government bonds in an asset-purchase program worth $1.3 trillion.

Draghi explained the reasoning behind the decision during a press conference in Frankfurt, "We see sustained adjustment in the path of inflation which is consistent with our aim of achieving our aim of inflation rates close to but below 2 percent."

He said that the exchange rate is not a policy target.

However, the immediate reaction for traders was to sell the euro, and that euro selling only picked up steam throughout the day; the currency plummeted to an 11-year low against the U.S. dollar, breaking the $1.14 threshold.

While the ECB isn't admitting that a weaker euro is the desired effect, it is certainly a helpful and quick way to stimulate growth through more competitive exports.

Read MoreEuro falls to fresh 11-year low on ECB decision

"Bottom line, as I doubt even the ECB believes that this news will directly increase bank lending, it is likely all about further weakening the euro," wrote Peter Boockvar of The Lindsey Group after the announcement.

Some central banks have been more explicit about wanting their currencies to weaken to defend themselves from stronger currencies ahead of the ECB's major move and the weaker euro.

The Danish central bank cut its main interest rate to minus 0.35 percent Thursday morning, from minus 0.20 percent, the second rate cut in a week. Denmark pegs its currency, the krone, to the euro, so it is trying to keep flows from racing out of the krone ahead of ECB action and a weaker euro.

Switzerland similarly anticipated a weaker euro and took a momentous and shocking step of ending the cap of the Swiss franc.

"Abandoning it now would arguably be less costly than defending if, as it seems likely the euro will continue to decline and the dollar will continue to appreciate," wrote Marc Chandler of Brown Brothers Harriman.

Read MoreECB needs to buy more bonds than Fed: CIO

Canada this week shocked markets by cutting interest rates for the first time since 2010, citing the sharp plunge in oil and its negative impact on the Canadian economy, which depends on oil exports.

That followed surprise moves from India and Peru last week.

The question investors are now asking: How does this all play out?

For the time being, they love it. Easier policy, low rates, QE, cheap money, weak currencies—it's all a recipe for gains in stocks and bonds, or as Kit Juckes, senior forex strategist at Societe Generale, summed up the reaction to the ECB move: "Pretty much unalloyed joy,"

However the worry is, What's the endgame?

Read MoreOpen-ended European QE starts 'with a bang'

In the 1930s when countries turned to competitive devaluations to boost growth, it backfired. The currency moves exacerbated the Great Depression by increasing trade tensions and barriers, raising business uncertainty and eventually cutting into growth.

"This currency war cannot go well. They never have," Art Cashin, director of floor operations for UBS at the New York Stock Exchange, told CNBC.

As far as how it shapes up this time around, as one trader said, "the book has not yet been written."