GO
Loading...

Whiff of Currency War 'A Little More Pungent': Pro

Friday, 3 May 2013 | 4:53 AM ET
Mario Draghi, President of the European Central Bank
Getty Images
Mario Draghi, President of the European Central Bank

Currency war rhetoric, which was left for dead after the G-20 summit last month, could get revived as another major central bank eases monetary policy, pummeling its currency lower, one analyst said.

On Thursday the European Central Bank cut interest rates by 25 basis points to 0.5 percent. The move was broadly expected, but ECB President Mario Draghi's talk of negative interest rates sent the euro tumbling by near 1 percent.

The ECB action comes nearly a month after the Bank of Japan shocked markets with radical policies to reflate its economy sparking a free-fall in the yen.

(Read More: Bank of Japan Unveils Aggressive Monetary Policy)

One analyst tells CNBC that the recent rate cut by the ECB has the potential to revive talk of a currency war which heightened at the start of the year.

"This is an example of yet another central bank cutting rates and in the process enhancing the price competitiveness of its country's [or in this case the country bloc's] export sector. The whiff of a currency war has just gone a little more pungent," said Tony Farnham, economist at Australian stockbroker Patersons Securities.

"It echoes the moves we've seen from Japan where their monetary policy has been to 'go big or go home,'" said Farnham.

"Draghi hinted that further rate cuts were on the way if the euro-zone's economic fortunes failed to lift - such actions would open the way for further depreciation of the euro," he added.

Speculation over currency wars came to a head at the start of the year when dramatic falls in the yen's value prompted criticism of Japan's economic policies from other world economies.

(Read More: Central Banks Pause, but 'Currency War' Not Over)

However, officials at recent G-20 meetings have made an effort to stamp out any further speculation of a currency war and effectively given Japan the green light to continue with its economic policies, which it has always denied were engineered to deliberately weaken the yen.

Other analysts were less convinced that the currency war debate was now back on the table.

(Read More: Any G-20 Criticism Unlikely to Derail Yen's Fall)

"The last few G-20 meetings have concluded that depending on the monetary and economic conditions in a country a weakening currency is not considered as a direct manipulation of a currency but reflection of those economic conditions," said Timothy Riddell, senior strategist for markets, at ANZ bank.

"The danger is to see policymakers as forcing currency moves but this is not the case. Recent currency moves are responses to the policy changes and relative economic performance," he added.

(Read More: Currency Wars Are Dead: Analyst)

According to Sean Callow, senior currency strategist at Westpac Bank, the ECB is not part of the whole currency war debate, because it is not implementing quantitative easing like the Federal Reserve or the Bank of Japan. "I doubt they will be accused of stoking currency wars."

He thinks, however, that the debate will return because of Japan's recent radical monetary easing.

Last month, Bank of Japan Governor Haruhiko Kuroda announced his intention to pump $1.4 trillion into the Japanese economy over the next two years.

— By CNBC.Com's Katie Holliday; follow her on Twitter @HollidayKatie

Featured

Contact FX

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More