Brazil’s finance minister has finally said it out loud. In a speech to his country’s industrial leaders struggling to remain competitive despite an overvalued currency, he said, “We’re in the midst of an international currency war", adding that “devaluing currencies artificially is a global strategy".

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So far, the fingers were pointed mainly at China. The US administration has been complaining about the artificially low value of the yuan, which it sees as a deliberate attempt to boost Chinese exports and make US exports uncompetitive. A Bill has been prepared in the US that calls for China to be labelled a “currency manipulator". The accusations have become shriller in recent times as the ongoing crisis continues to take its toll on the economies of the developed world. Growth is anaemic. High rates of unemployment have led to a political backlash. President Barack Obama’s approval ratings have plunged. Hence the need to keep the value of the dollar down so that exports can help the US economy. Since last June, the US dollar index has declined sharply, while the euro, the yen and emerging market currencies have appreciated, adding to the tension.

Japan, in particular, has been badly hit. Mired in a depression for the last two decades, the Japanese have seen their currency shoot up to a 15-year high against the US dollar. Japanese leaders have squarely blamed China for the undervalued yuan. The Japanese central bank has been intervening in the currency markets, buying up US dollars in an attempt to keep the value of the yen down and help its exporters. And it’s not just Japan that is doing it. Central banks in Chile, Colombia, Peru, South Korea, Russia, Taiwan and Thailand have recently intervened in the currency markets, all of them desperately trying to stop the value of their currencies depreciating sharply against the dollar.

On the other hand, it can be argued that US policies, too, are calculated to depreciate the dollar. The current bout of weakness in its currency stems from the hopes of another round of quantitative easing as the US Federal Reserve buys bonds, a policy that would pump more money into the system, thus lowering interest rates even further and depreciating the dollar. It’s no wonder the Chinese, who have huge currency reser-ves parked in US treasurys, are taking a very dim view of the US monetary policy.

At the bottom of the problem is the collapse of consumer demand in the US. If, as most economists believe, consumer demand in the developed world will remain muted because of deleveraging, that means growth will no longer be as strong as before in export-oriented economies such as China, Germany, Japan or South Korea. As a recent World Bank paper put it, “From a global perspective, current account surpluses in a large number of developing countries would have to be matched by deficits in the industrialized world. One result of the crisis is that large-deficit countries such as the United States may be neither prepared to run nor capable of running ever larger deficits to absorb an increase in the exports of developing countries. Instead, a reduction in consumption spending in deficit countries is likely and a global rebalancing almost inevitable." The large surplus countries will then have to make painful changes in their economies to adjust to the new environment or, alternatively, compete even more vigorously for export markets. Hence the competitive devaluations.

Beijing University professor Michael Pettis points to another reason for the return of the trade wars. He says that trade-deficit countries on the European periphery, whose deficits together make up around two-thirds of the US deficit, are now finding it very difficult to attract capital. That would mean they will have to cut back on their deficits. But if their deficits shrink that implies the surplus of other countries too will have to shrink. The question, then, is whether that adjustment will have to be done by countries in Europe that have a surplus, such as Germany, or countries such as China. He believes that if countries such as Japan and China are not prepared to let their surpluses shrink, it will inevitably lead to protectionism and trade wars.

Doomsayers point to the Smoot-Hawley Act passed in the US in 1930, which raised tariffs and led to tit-for-tat beggar-thy-neighbour policies being adopted by other nations in the wake of the Great Depression. The US had also devalued the dollar by 40% against gold at the time, as the “Calculated Risk" blog points out. This time, however, World Trade Organization rules will limit protectionist measures, as will global production chains. For instance, any measures taken by the US against China could well hurt US companies that manufacture goods in China for export. And it’s very doubtful whether any revaluation by China will help the US, simply because Chinese costs are far lower than costs in the US.

But while these are mitigating circumstances, the fact remains that the falling dollar and the yuan’s peg to it is a concern for many other countries. The worry that countries will be forced into competitive currency depreciation is one of the factors responsible for the rise in gold prices.

In India, a widening current account deficit has for the moment been able to hold back excessive gains in the currency, though the rupee is overvalued in REER (real effective exchange rate) terms. It’s significant, though, that the recent update to the Asian Development Bank’s Asian Development Outlook points out that, for India, the two threats to macroeconomic stability are inflation and “continued appreciation of the rupee."

Manas Chakravarty looks at trends and issues in the financial markets. We welcome your comments at