Wait: We Want Weak Currencies?

Kathy Lien explains what could be the basis for a global FX war

It seems a little backward: Countries are looking for weak currencies. It’s an interesting paradox brought on by the recent global financial crisis and continuing recession. Japan has always wanted a weak currency, but most other countries are reluctant to admit to such a thing.

But it’s all coming out in the open now. GFT’s Kathy Lien explains in FX360 why countries are interested in weak currencies — and whether the race to keep currencies down could result in a global FX war:

In an environment of slowing growth and falling prices, every central bank wants a weak currency. However up until now, most major central banks have been reluctant to intervene in the foreign exchange market to artificially weaken their currencies because of the burden it would put on other countries. …

However, today Switzerland has broken that unspoken truce of letting the market determine who gets to benefit from a weaker currency and who doesn’t. By becoming a massive seller of Swiss Francs, they are in effect artificially driving other currencies higher. This means that they are putting their own interests ahead of everyone else’s and unfortunately that may trigger retaliation by other central banks. A global FX war where central banks around world start selling their own currencies, countering each other’s efforts is possible but still not all that probable. Switzerland is less of a threat to the U.S. than to the European Union because they are a leading trade partner for the EU and not for the U.S.

Meanwhile, the U.S. dollar is down against the euro in forex trading right now as the stock market rallies.