The global race to the bottom in currencies may be less a war than it is an inevitable reaction to the growth of developing countries and the need for export-driven economies to stay competitive.
That's the view of experts who, while not wholly subscribing to the idea of a currency war, believe weakness in the US dollar, Chinese yuan and other major global currencies represents what could be the early days of a trade battletriggered by the strength of emerging markets.
While countries have different reasons for devaluing their currencies, one of the common threads is a desire to keep up with the cost of goods from other export-driven nations in the global marketplace.
This battle goes well beyond trade, however. A weaker dollar has pushed up commodity prices worldwide, with gold and other precious metals hitting record highs. Stocks and bonds also have been vulnerable to fluctuations in foreign-exchange markets.
The latest effort at devaluation came from Japan on Tuesday when its central bank nudged its target interest rate to zero, which the US stock market took as provocation for the Federal Reserve to embark on another easing round of its own.
"I don't think we're in a fully fledged competitive devaluation environment at the moment," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "Certainly there is the desire against the backdrop of a very uncertain global growth outlook to get any advantage that particularly the exporting countries of the world have."
Traders continue to push the US dollar lower, sending the dollar index, as measured against a basket of foreign currencies, to its lowest intraday level since Jan. 19 in Wednesday trading.
The euro was last this high against the dollar on Feb. 3.
At the same time, European Union countries have stepped up pressure against China to allow its currency to rise, reflecting a long-standing global belief that the nation was taking an unfair trade advantage through its weak currency.
Taken in sum, the various currency moves reflect an indication that as the world economy begins to recover, trade tensions are likely to resume as well.
"The level of global cooperation that had seemed quite strong at the height of the financial crisis appears to have slipped back quite sharply," Osborne said. "Certainly it's an escalation in the trade war if not the currency war."
Treasury Secretary Timothy Geithner, in a speech delivered Wednesday to the Brookings Institution think tank, called for a "multilateral mechanism" to level the currency trading field, and even harkened back to the Bretton Woods agreement in 1944 that established the since-abandoned gold standard.
"It is unfair to countries that were already running more flexible regimes and let their currencies appreciate," Geithner said. "And it requires a cooperative approach to solve, because emerging economies individually will be less likely to move, unless they are confident other countries would move with them."
Indeed, the battle appears to be most pitched not between some of the old economic stalwarts but rather between developed and emerging markets.
Emerging markets such as the BRICs—Brazil, Russia, India and China—are seeing strong economic growth and in fact are able and even desirous of keeping strong currencies in the interest of controlling growth. It is where those imbalances are not being addressed that is causing much of the friction.
"The real key is the progress the developed world makes against the emerging world in promoting flexible exchange rates and the pricing of exchange rates vis a vis the emerging world currencies," says James Paulsen, chief market strategist at Wells Capital Management in Minneapolis. "That won't happen overnight. To the extent that it moves in that direction, that's a huge positive for Western economies."
Paulsen is less troubled by the currency jockeying, maintaining that the dollar index usually drops at this time of year. The index was near the current level in 2009 and 2007, but was about 5 percent higher in 2008.
The Fed, he and Osborne say, is largely powerless to change monetary policy now that it has cut rates to near zero, despite the jawboning over a second phase of quantitative easing expected to begin in November. Changes, they say, will come in the global marketplace.
"The developed world as a whole will engage in a chronic slow and steady devaluation against the emerging world currencies," Paulsen said. "The emerging world is in a different growth profile with different growth characteristics. They can afford a slow and steady increase in their currencies. It won't be US vs. China, it will be developed vs. emerging."
At the same time, the effort to promote growth through currency devaluation continues to have its critics.
"Our Treasury, Fed and administration still don't understand that you can't print jobs, and devaluing your currency doesn't boost exports or balance the trade deficit," Michael Pento, senior economist at Euro Pacific Capital in New York, said in an e-mail. "All it does is send everything priced in dollars up, while creating huge imbalances in the economy."
Pento called the US "the chief currency manipulator" and said the current conflicts are less a currency war than "a skirmish between the U.S., Japan and China. But it may become WW III if Geithner doesn't close his mouth."
Osborne, too, says the rhetoric against China is much like the US complaints against Japan in previous decades and reflects political posturing ahead of the November midterm elections as much as anything.
"I don't think there's anything necessarily new here except the characters have changed to a degree and the focus of US companies has changed," he said. "But essentially they are the same problems we've had in the last couple of decades in the global economy."