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What’s a Reverse Currency War and Who’s Fighting One?

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Currency wars flare up from time to time, usually during moments of economic tumult. They typically involve countries jockeying for a competitive export edge by driving down their currencies. What’s less common is a so-called reverse currency war. But it’s possible that one could be brewing, whether as the result of deliberate policies or as a side effect of steps central banks are taking to fight inflation. In particular, the sharp rise in the value of the dollar as the US Federal Reserve pursues its most aggressive interest-rate hikes in almost 30 years is posing challenges to currencies and central banks around the world. 

If a country’s currency falls in relation to other currencies, that can help its economy. Its exports become cheaper relative to competitors, boosting demand from abroad, while higher import prices spur domestic consumption of more homegrown products and services. And both of these provide support to local producers. A round of competitive devaluations is thought to have deepened the Great Depression that began in 1929, with countries leaving the then-prevalent gold standard to weaken their currencies. In the early years of this century, the US and other rich countries complained that China was depressing the value of its currency, the yuan, to increase exports. But the phrase “currency war” was only popularized around 2010, when Brazil’s then-finance minister, Guido Mantega, accused wealthier nations of devaluing their currencies to stimulate economies still reeling from the financial crisis of two years before.