The race for a devalued currency is set for a new set of twists and turns this summer as analysts contemplate how the U.S. Federal Reserve will deal with a dollar that is far stronger than its global counterparts.
According to Societe Generale's Albert Edwards, the spark for this new round of "currency wars" – whereby countries manipulate foreign exchange to gain a global advantage -- is the Japanese yen, which fell to its weakest against the greenback since 2002 on Tuesday.
The uber-bearish strategist predicts that "off the scale" quantitative easing (QE) by the Bank of Japan could see it continue to weaken and "set off another round in the global currency war." He adds that this could have a detrimental effect on major economies around the world.
"As the yen drags down other regional currencies, and the (Chinese) renminbi is forced to participate in a competitive devaluation, deflation fears will surely quickly reignite in the west," he said in a new research note on Tuesday.
Manipulating reserve levels can be one way that a country's central bank can intervene against currency fluctuations along with altering benchmark interest rates and QE. Central banks often iterate that exchange rates are not a primary policy goal and can be seen more as a positive by-product of monetary easing.
There have been discussions in the last few years that countries are purposefully debasing their own currencies -- a concern that was termed "currency wars" by Brazil's Finance Minister Guido Mantega in September 2010.