Currency wars: Is the euro losing the battle?

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The latest stage of the world's "currency war" is upon us, analysts have warned – and the euro could well lose the battle.

Talk of currency wars – when a government introduces measures so its currency is weakened to bolster exports – returned following the European Central Bank's (ECB) surprise rate cut at its November meeting. The term gained popularity in 2010 when it was used by Brazil's Finance Minister after developed nations - such as the U.S. and the euro zone - rolled out a series of easing measures to bolster their exports by weakening their currencies.

The ECB announced on November 7 a quarter-point cut in its refinancing rate to a new record low of 0.25 percent. It followed surprisingly low inflation data which sparked concerns that the 17-country euro zone was heading for a period of deflation.

(Read more: Are the cracks in the euro starting to show?)

ECB President Mario Draghi has repeatedly insisted that the euro's exchange rate "is not a policy target" – in fact the bank's founding treaty stipulates that its sole goal is to control inflation -- but the euro moved significantly lower nevertheless, falling from $1.3526 to $1.3331 following the cut.

However – until talk of the ECB introducing a negative deposit rate rattled markets late Wednesday – the euro recovered over the next 13 days, topping its pre-rate-cut level early on Wednesday, leading some analysts to argue the currency was no danger of being weakened and would remain so.

"The fact that the EUR/USD exchange rate is so well supported suggests to me that the EUR is losing the battle," Jane Foley, Senior Currency Strategist at Rabobank, told CNBC.

Nothing new on negative rates: Draghi

Lee Hardman, currency economist with Bank of Tokyo-Mitsubishi, agreed.

"We would argue that the recent strength of the euro despite very weak economic growth and low inflation highlights that the euro-zone is currently being left behind in any perceived currency war," he told CNBC.

Foley added that as long as loose monetary conditions remain in the U.S., "The ECB will have to run just to stand still in the fight to stop EUR/USD pushing higher."

A stronger euro – which would hit exports by making them more expensive on the global market – could seriously hinder the euro zone's efforts to grow and regain its competitiveness.

ECB's medicine

On Wednesday, however, a report from Bloomberg News that the ECB was considering introducing a -0.1 percent deposit rate sent the euro sliding against the dollar.

(Read more: Is the euro the next currency battleground?)

The euro slipped to $1.3417 on the speculation, although by midday Thursday in London it had recovered to trade at $1.3466 following comments by Draghi playing down the reports.

Bank of Tokyo-Mitsubishi's Hardman said that although the euro sell-off may not extend much further in the near-term, it reflected speculation that the ECB will have to ease its monetary policy further.

"With conventional easing measures almost exhausted, this is encouraging speculation that the ECB will have to adopt more unconventional measures such as lowering the deposit rate into negative territory," Hardman said, given the weak growth and low inflation outlook in the euro zone.

And in a recent report on currencies HSBC's Global Head of FX Strategy David Bloom agreed, saying that further monetary easing was likely in the euro zone.

"Fortunately, the ECB has potential medicine at hand to try and reduce the pain being inflicted by the stronger EUR," Bloom wrote in a recent currency report.

He highlighted that although much has been made of the euro zone's recovery, it is getting increasingly unlikely that there will be any more good news surprises in the near future.

(Read more: What cuts? US austerity 'tougher than in Europe')

"It is hard to isolate the role of the stronger euro in these more recent disappointments but it is clear that net exports have been an important part of the recovery story," Bloom wrote.

Blame Germany?

Germany – the euro zone's largest economy which has been powering ahead as its neighbors struggle – has been accused of hitting the chances for recovery of its fellow euro countries by having a strong export market and budget surplus.

Indeed, Rabobank's Foley said it was Germany's strength that was lending the euro support.

"Germany is helping the euro zone lose the currency war, on the assumption that currency weakness is the desirable result," she told CNBC.

I don't buy currency war narrative: Lamy

Last week, the country came in for criticism from both the U.S. Treasury and the European Commission's economic chief Olli Rehn for its trade surplus. Germany's exports exceed its imports to such an extent that its trade surplus widened to 18.8 billion euros in September.

This reliance on exports is hurting Europe's economic recovery, critics said, amid increasing pressure for Germany to boost its domestic demand.

"The surplus is also a reflection of weak investment which if sustained will undermine productivity and economic growth in the long-run," Bank of Tokyo-Mitsubishi's Hardman said.

(Read more: German business: Europe should copy, not criticize surplus)

He added that it Germany's use of the euro that enabled it to export so much.

"Germany is continuing to benefit from being within the euro-zone without which its own domestic currency would be significantly stronger given Germany elevated account surplus," he said.

However Pascal Lamy, the former director general of the World Trade Organization and author of "The Geneva Consensus: Making Trade Work for All," disagreed.

"The reasons why the Germans have a trade surplus is not the currency," he told CNBC. "Look at what's happened where the majority of German trade takes place: within the European Union. Their trade surplus has shrunk within the European Union."

Indeed, Lamy said he did not buy the "currency war narrative" at all, arguing that real trade-weighted exchange rates have actually been very stable – even between the big currencies like the euro and the dollar.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google Plus