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Currency wars may be too strong a term to use just yet; skirmishes may be more appropriate. But there’s no denying that the global currency landscape is starting to look tense. Most of the world’s major economies, barring the US, are struggling to revive growth and a weaker currency seems to be part and parcel of the remedial strategy.

Japan has done it. Europe is doing it. And now everyone is watching carefully to see how the US and China will respond.

The growing discomfort around the strength in the US dollar is now coming through clearly in commentaries from the US Federal Reserve and the US treasury department. In the minutes of the US Fed’s January meeting, released on Wednesday, Fed officials acknowledged that the dollar has strengthened against currencies of most other advanced nations amid investor concerns about growth in those economies as well as increased monetary accommodation in some of these countries. The minutes go on to show that a few members of the Federal Open Market Committee felt that the value of the dollar could be a “persistent source of restraint" on US exports.

Comments from the US treasury department have been sharper. The US will “push back very hard" against countries that target weaker exchange rates to get a trade advantage, said US treasury secretary, Jack Lew, while he was in India earlier this month.

The comments have helped cool the dollar just a tad, with the US Dollar index coming off the 11-year highs that it had hit in January.

The question is: will these words be backed by any sort of action? The most obvious of those actions would be delaying the rate hike cycle in the US, which, by consensus, is expected to begin sometime in the summer. Calls for a delay in the rate hike have been growing. According to a 4 February article on news website Marketwatch.com, the likes of Warren Buffett and Jack Welch are arguing against early rate hikes. “It would be ludicrous to raise them right now with the situation we have. We’ve got oil problems… and we’ve got a strong dollar, which is killing exports," Welch was quoted as saying.

China is the other nation everyone is watching.

Some believe that China is already participating in the currency tensions by kicking off a monetary easing cycle. It cut its benchmark rate in November and followed it up with a reserve ratio cut earlier this month. The yuan, which has been slowly depreciating, hit an 8-month low in late January, but has since stabilized.

If anyone, China has an incentive to keep its currency weak, given the slowdown in its economy and its reliance on exports. But how far will it go? Will it do more to depreciate its currency to boost exports? That’s the moot question. Remember that China still has a managed floating exchange rate and by widening the band in which the currency trades, its central bank can allow it to depreciate faster.

If China does go in that direction, Japan, South Korea and others in the region, which compete directly in the market, may follow. And in that scenario, the US will be hard pressed to remain silent.

Where does this leave an emerging market like India? Well, all we can do is watch from the sidelines.

The correlation between the Indian rupee and the global Dollar index has weakened considerably since last year because of the strong inflows of capital into India. So, while the Dollar index gained nearly 13% in 2014, the rupee weakened only 2%. In 2015, the Dollar index has gained another 4%, but the rupee has strengthened 1.1%.

But if the dollar reverses course and starts weakening, the correlation may actually strengthen and the rupee may strengthen more than peer currencies. Strong inflows (if they continue) coupled with a weaker dollar may lead to quick appreciation in the rupee, which the Indian central bank may not be thrilled about.

The extent of response from the Reserve Bank of India (RBI) will depend on whether the rupee is moving out of sync with other emerging market currencies. If not, it may continue doing what it is doing now—absorbing any excess dollar flows. But if additional monetary easing leads to a flood of dollars into India, the RBI may have to do more.

At a more macro level, will currency wars be bad for emerging markets like India? The consensus view is that no one wins in a currency war, but there are some who argue otherwise. An interesting view came from economists at BNP Paribas, who said that a currency war may potentially be a “win-win" for the global economy. “If everyone devalues, the global economy gets a much needed monetary boost," said Richard Iley, chief Asia economist at BNP Paribas, in a November report. He argued that since exchange rates are simply relative prices, “tit-for-tat" devaluation will mean that exchange rates will return to their original levels. Meanwhile, the monetary expansion undertaken in the process will help push up global aggregate demand. “It is only conscientious objectors (non-easers) that suffer most in a currency war," said Iley.

Ira Dugal is assistant managing editor, Mint.

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