"The currency war" could worsen the current crisis

The tense discussions on the matter of the "currency war" have opened the horizon for a difficult compromise among the strongest economies of the world, which, according to many analysts, would lead to the worsening of the current crisis.

Analyst Călin Rechea considers that the currency war will not lead to a new financial crisis, like the European Competition commissioner Joaquin Almunia warned, but considers that this will lead to the deepening of the crisis.

"We will not see a new crisis, just a worsening of the current one", said Călin Rechea for "BURSA", who stressed that we will see a wave of protectionist actions all across the world, similar to the one which occurred during the great crisis of the 1930s.

Joaquin Almunia recently said that if the currency war persists, it could lead to great troubles which would later cause the affected countries to resort to protectionist measures, due to the exports of China and other countries that followed its currency policy, such as Brazil and South Korea.

After the USA continued to support the countries which had big trade and current account surpluses, emerging economies which rely on exports were unhappy with the decision of rich countries to flood the markets with freshly printed money, causing the currencies of the former to appreciate against the dollar.

Thus, the dollar suffered a strong depreciation against the Chinese yuan and the Japanese yen, down to a 12-month low, which threatens the exports of the two countries. China and Japan are the largest buyers of federal bonds issued by the US Treasury, with both countries having an exposure of over 800 billion dollars each.

The dollar followed the same trend in relation to the Euro, as investors continued to sell dollars and buy commodities and stocks.

Also, the strengthening of the yen against other currencies had a negative effect on the Japanese economy, which is largely dependent on exports.

The Japanese government recently approved a financial program of 5,100 billion yen (63 billion dollars) to fight against deflation and the strengthening of the yen.

Over these past few weeks, markets have been concerned about the threat of a currency war, which would affect international trade. Last week, Brazilian Minister of Finance, Guido Mantega, was the first to use the expression "currency war" in public, by invoking unilateral measures taken by many countries to prevent the appreciation of their currencies, in particular China, which is keeping its yuan weak to prop up its exports.

"The exchange rate of the yuan is pegged to the dollar, meaning that a depreciation of the latter automatically makes China"s exports more expensive", analyst Călin Rechea explained.

Even though it is currently unclear how far China will go with its monetary policy, Japan and Brazil have already taken steps to devalue their currencies.

The depreciation of the dollar is also affecting Europe, as on Monday, the Euro passed the threshold of 1.35 dollars/Euro, going back to levels which are traditionally harmful for exporter countries, such as France.