Currency War? Not Just Yet, Expert Says

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Have you heard there's a war going on? A currency war, that is.

Talk of a currency war is everywhere. But Marc Chandler, chief currency strategist at Brown Brothers Harriman, is skeptical.

Yes, central banks in developed economies are cutting interest rates or delaying rate hikes, and yes, emerging market countries are objecting when their currencies appreciate. But it's all a natural outgrowth of floating exchange rates, Chandler said.

"Given the synchronized economic downturn in the high income countries, it is not surprising that monetary policy has become synchronized and that most officials want weaker currencies. And this is at loggerheads with the many of the leading emerging market currencies that are not willing to accept substantial currency appreciation," he wrote in a note to clients.

But even so, he continued, "despite a desire for weaker currencies, neither the Bank of Canada nor the Bank of England are about to intervene materially in the foreign exchange market, for example. And if some countries cut interest rates to offset their currencies' strength, well, that is how the adjustment process is supposed to work."

You may be wondering where Japan fits in this picture, now that the Bank of Japan has doubled its inflation target and announced a new stimulus program.

For Chandler, it's all part of the process. "Japan has swung from a trade surplus to a trade deficit. In fact, on a seasonally adjusted basis, it has not recorded a monthly trade surplus since February 2011," and its latest trade deficit was at record levels.

Meanwhile, OECD calculations have the yen about 14.6 percent overvalued in terms of purchasing power parity, he said. "While we do think Japanese officials would welcome a weaker yen, we see in the rhetoric an attempt to ease concern that it is seeking an endless or even protracted decline."

Whether conditions will deteriorate from here is, of course, unknown. But for now, Chandler said, "A real currency war remains a remote possibility. The recent clash is largely in the realm of rhetoric and does not appear substantially different than what has been seen through the floating rate area."

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