War of Weakening Currencies May Be Based on False Premises

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In the past few years, central banks around the world have pumped trillions of dollars into the financial system, partly motivated by the desire to keep their currencies weak in relation to others.

Yet a weaker currency is not the booster conventional economic wisdom suggests, according to Steven Englander, head of currency strategy at Citi.

The traditional view that a weaker currency boosts exports and therefore stimulates the economy is over-simplified, he argued.

"Economies with weak fundamentals rely on a weak currency to bail themselves out.Economies with strong fundamentals do not need the crutch of a weak currency.So currency weakness may be more a symptom of underlying issues than a cure all for policy mistakes and structural rigidities," he said.

This may be bad news for Japan, where the incoming government seems determined to drive the yen down to boost its big exporters.David Bloom, head of currency strategy at HSBC, has warned that the yen will strengthen again once "reality sinks in" about the new government.

(Read More: Trading the Japanese Election)

Other major currencies like the U.S. dollar, euro and sterling have been driven slowly down by central banks' actions during the credit crisis. As Englander pointed out: "It is hard to find a policymaker who hasn't actively tried to talk his currency down."

The U.S.has been the winner in the latest spate of currency wars, as its central bank the Federal Reserve has succeeded in prodding other central banks into following its easing of monetary policy, according to Englander.

(Read More: Why Central Banks Still Hold All the Cards)

The European Central Bank (ECB) and the Bank of England both meet on Thursday and are expected to maintain the status quo for interest rates and asset purchases, after hefty programs earlier in the credit crisis.

(Read More: Why The ECB May Cut Rates)

Yet for the U.K. and eurozone, the trade balance has failed to improve as the currency has weakened,again challenging the conventional view that a weaker currency means trade improves.

"Trade patterns respond with long and variable lags to currency moves, and in the mean-time issues such as productivity gains, savings, investment productivity growth, human capital investment, industrial structure, unionization, taxation,competitiveness and regulation seem to matter a lot more for a lot longer," Englander said.

Countries would be much better if they focused on improving the quality of their exports,as developed countries are rarely going to be able to compete with the cost of manufacturing cheaper products in poorer countries, he pointed out.

One of the features of the credit crisis has been "on-shoring," or the return of some manufacturing from developing to developed countries as places like the U.S. got cheaper – but this has not been anywhere near large enough to counteract the longer-term trend away from richer countries.

The real problem is overvalued domestic assets, according to Englander.

"If asset prices and are overvalued and households and businesses have taken out loans that they cannot pay back,it takes a lot longer to get prices and balance sheets back to equilibrium," he warned.

Written by CNBC's Catherine Boyle. Twitter: @cboylecnbc