Just eight months ago, Brazilian Finance Minister Guido Mantegadeclared a “truce” in competitive currency devaluations. Now,Japanese and Swiss moves to weaken the yen and the franc showreviving tension in foreign-exchange markets as the deterioratingU.S. economy weighs on the dollar.

Japan sold yen today, causing the currency to weaken as much as4 percent against the dollar after rising 5 percent last month.“Ongoing one-sided moves” would hurt the recovery from a Marchearthquake, Finance Minister Yoshihiko Noda said. Yesterday, theSwiss National Bank cut interest rates to rein in the franc after again of about 36 percent in the past 12 months.

Europe's sovereign debt crisis and the battle between Republicanleaders and U.S. President Barack Obama over the budget andborrowing limits drove investors to the perceived safety of yen andfrancs. The risk of a U.S. return to recession, forcing the FederalReserve to another round of monetary easing, has exacerbated dollarweakness. The currency's drop last year left all of Asia's 10biggest economies seeking to influence their own exchange rates toaid exporters and growth.

'A New Stage'
“We seem to be entering anew stage of the currency wars where it's not just the emergingmarkets that are responding to broad dollar weakness,” said CallumHenderson, global head of currency research at Standard CharteredPlc in Singapore, who has written books on currency markets.“Expect much more intervention in the future and further acrimonyin terms of how the U.S. dollar is doing.”

The U.S. economy shows signs of slowing, say five of nineeconomists on the academic panel that dates recessions. HarvardUniversity economics professor Martin Feldstein, a member of theBusiness Cycle Dating Committee of the National Bureau of EconomicResearch, sees a 50 percent chance of another recession.

Finance officials from Group of Seven nations held a conferencecall yesterday to discuss the European sovereign debt crisis andthe U.S. political stalemate over raising the borrowing ceiling,according to a G-7 official.

Asset Purchases
A government reporttomorrow may show the U.S. unemployment rate held at 9.2 percent inJuly, according to the median forecast in a Bloomberg survey, upfrom 8.8 percent in March. Barclays Capital economists cited “QE3speculation picking up” ahead of the Fed's Aug. 9 policy meeting,referring to a third round of quantitative easing, where the Fedmounts asset purchases.

Among the 16 major currencies, the Swiss franc, New Zealanddollar, yen, Brazil's real and Singaporean dollar have gained themost against the U.S. currency in the past three months, accordingto data compiled by Bloomberg. The euro has tumbled more than 3percent against the greenback. The European currency dropped 0.8percent today versus the dollar to $1.4214 as of 10:17 a.m. inLondon.

Brazil's Mantega said Nov. 30 that his nation's currency wastrading at a reasonable level as Europe's worsening debt crisisbrought a “temporary truce” to a global currency war. Since then,the real has gained about 10 percent against the dollar, andMantega said last month that the so-called war was still on.

More Stimulus
Mantega's complaint followedFed Chairman Ben S. Bernanke's August 2010 statement in JacksonHole, Wyoming, that policy makers would provide more stimulus ifneeded. The statement, which the Fed followed up with a decision inNovember to buy $600 billion in Treasuries, sparked outrage fromcountries including Brazil that devalued currencies to counter theeffects of capital flows to emerging markets.

Brazil buys dollars to limit gains in the real and has alsointroduced rules aimed at discouraging bets on dollar weakness. TheSouth American nation said on Aug. 2 that it will provide $16billion in tax breaks and toughen trade barriers to protectmanufacturers hurt by a currency rally that's fueling a surge inimports from China.

Latin American finance officials plan to gather this month todiscuss ways to protect their currencies and economies from theturmoil in the U.S. and Europe.

Bank Lending
The Bank of Japan todayexpanded an asset-purchase fund that includes government bonds,real-estate investment trusts and corporate debt to 15 trillion yenfrom 10 trillion yen. It also boosted a program aimed atencouraging banks to lend by 5 trillion yen, bringing it to 35trillion yen.

The yen traded at 80.14 per dollar as of 11:06 a.m. in London,down 4 percent, exceeding the 3.93 percent decline on March 18,when the nation's central bank last moved to weaken thecurrency.

In New Zealand, Finance Minister Bill English said today thatthe government can do little to alter the currency's course afterit rose to 88.43 U.S. cents on Aug. 1, the most since exchange-ratecontrols were removed in 1985. New Zealand's central bank doesn'tcomment on currency intervention, spokesman Mike Hannah said whenasked if Japan's move has affected the Reserve Bank of NewZealand's currency actions.

The central bank should seriously consider intervention shouldthe New Zealand dollar remain in the high 80s over “coming weeks”while export commodity prices slide, Roger Kerr, who advises oncurrencies as owner of Asia-Pacific Risk Management, wrote in acolumn this week on interest.co.nz, an online financial newsprovider.

Rate Increases
Currency gains may meanthat central banks in nations including New Zealand, Canada andAustralia tighten monetary policy at a slower pace than theyotherwise would, said Sue Trinh, a senior currency strategist inHong Kong at Royal Bank of Canada.

“It manifests itself by more pushing back or delaying of anyplanned rate hikes as opposed to outright intervention to weakentheir respective currencies,” Trinh said. “You're seeing thatalready. The Bank of Canada has been pushing out its tighteningcampaign, the Reserve Bank of Australia is taking on a protractedpause in its tightening cycle and there are question marks on howaggressively the Reserve Bank of New Zealand is able to hike aswell.”

'Prudential Limits'
South Korea'sgovernment is reviewing “all possibilities” on curbing capitalinflows, Finance Minister Bahk Jae Wan told reporters in Seoultoday, adding that he's “closely monitoring” the situation, whiledeclining to comment on the impact of Japan's intervention.

The Philippines is prepared to impose controls to cap volatilityin the peso after its currency rose to a three-year high this week,central bank Governor Amando Tetangco said in an e-mail lateyesterday. The bank “will not go against the fundamental currencytrend but will not hesitate to use tools, including imposingprudential limits on certain transactions of banks,” he said.

Turkey's central bank said today it will sell dollars to bankswhen it sees it's necessary to support foreign exchange liquidityin the domestic market. Policy makers there unexpectedly loweredtheir benchmark interest rate to a record low of 5.75 percent todayafter an emergency meeting of the monetary policy committee.

At Standard Chartered, Henderson highlighted that Japan andSwitzerland were both members of the Group of 10 nations, signalinga shift from the early 2000s when the G-10 countries didn'tintervene, with the exception of Japan. “The currency wars willcontinue to bubble along and get worse.”

Bloomberg News

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