As the US dollar continues to depreciate, many other economies are being forced to intervene in the foreign exchange markets to devalue their own currencies. The world's main economies are trapped in a likely "currency war," which might hamper the recovery of the world economy.

Defination of "currency war"

Traditionally, a currency war refers to the situation where one nation, relying on its strong economic power, buffets its competitors and seizes other nations' wealth through monetary and foreign exchange policies.

It is a form of economic warfare with cold premeditation, specific purpose and considerable destructive power.

However, there is no obvious evidence that many countries are conducting a "currency war" in this sense.

Actually the meaning of the so-called "currency war" right now is much more simple and specific: some nations, which are facing internal economic difficulties, devalue their currency to simulate exports and create more jobs. If more and more nations adopt this kind of foreign exchange policy, the interest conflicts between them will get worse, damaging the recovery of the global economy.

The current situation is far from a war, although there is more conflict between nations' monetary policies. The Western media's hyping of a "currency war" has exaggerated divisions on currency policies and brought more tension to the international community.

US is culprit of "currency war"

It appears the cause of a likely "currency war" is the upgrading of conflicts on the RMB exchange rate between the United States and China.

Some other main economies also took action in this "war." The Japanese government launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil, South Korea and Singapore also used guerrilla tactics of doubling taxes on capital inflows to stop their currencies surging, which also played an important role in fueling a possible "currency war."

Yet the real cause of the likey "currency war" rests with the United States.

Firstly, the United States is facing a sluggish economic recovery and high unemployment, and the economy has been a major issue of the Nov. 2 midterm elections. Many US politicians have the impulse to use the RMB exchange rate issue as a scapegoat for the weakness of US economy. They highlighted the question of the yuan's exchange rate and intensified the dispute, making the the RMB seem the eye of the storm.

Secondly, the root cause is the Federal Reserve's massive printing of money in response to the financial crisis. The Fed adopted expansionary fiscal and monetary policies and infused massive liquidity into the market, which caused depreciation of its currency.

The result is that other related countries, such as those in South Korea, Brazil and Singapore, will face pressure to appreciate their own currencies versus the US dollar, posing challenges to their export and financial security. These countries are forced to intervene in foreign exchange markets to hold down their currencies, thus forming a latent "currency war."

What should be noted is that the United States has adopted a "double standard": in the eyes of some US politicians, it is reasonable for the Fed to "print money" to devalue the dollar but illegal for other countries to hold down their currencies to maintain their economic and financial security.

(Xinhua News Agency October 18, 2010)