The western front of the currency war

EU pushes China on currency -- but action unlikely

Countries around the world are acting to keep their currencies from rising, in what one official calls a looming "international currency war." Europe, however, stands out as unlikely to intervene and lower the value of the euro.

European leaders do complain publicly that the euro is too strong against China's yuan -- a key trade disadvantage for the 16 countries that use the shared currency.

But analyst say that displeasure probably won't go farther than talk.

The European Central Bank remains skeptical in principle of interventions -- actually buying and selling currencies to affect exchange rates, while European Union leaders have praised China's commitment to purchase debt issued by troubled Greece -- a measure that would support rather than lower the euro.

Many countries (25 in one week according to Hinde Capital) are trying to devalue their currency versus the U.S. dollar. One major country is making their currency rise versus the U.S. dollar—China. The Chinese use a currency basket to value the renminbi, which means that in order to diversify away from the U.S. dollar they must buy the currencies of other countries.

The Federal Reserve has admitted it wants more inflation and will probably launch the QE2 unless the markets first do their work for them. In other words, the world's largest economy, the home of the world's reserve currency and the financial capital of the world, wants to devalue its currency. The world's largest manufacturing economy, the world's largest source of GDP growth and the largest foreign holder of U.S. Treasuries, is working in concert with the United States (albeit independently and for their own benefit), as it buys the currencies of the world. The response of everyone else is to try to inflate faster than the United States.

We just had a decade of inflation that ended with the financial crisis. If the countries of the world behave the same way, what will be the result?