Brazil Finance Minister Guido Mantega popularized the term“currency war” in 2010 to describe policies employed at the time bymajor central banks to boost the competitiveness of their economiesthrough weaker currencies. Now, many see lower exchange rates as away to avoid crippling deflation.

Weak price growth is stifling economies from the euro region toIsrael and Japan. Eight of the 10 currencies with the biggestforecasted declines through 2015 are from nations that are eitherin deflation or pursuing policies that weaken their exchange rates,data compiled by Bloomberg show.

“This beggar-thy-neighbor policy is not about rebalancing, notabout growth,” David Bloom, the global head of currency strategy atLondon-based HSBC Holdings Plc, which does business in 74 countriesand territories, said in an Oct. 17 interview. “This is aboutdeflation, exporting your deflationary problems to someoneelse.”

Bloom puts it in these terms because when one jurisdictionweakens its exchange rate, another's gets stronger, making importedgoods cheaper. Deflation is a both a consequence of, andcontributor to, the global economic slowdown that's pushing theeuro region closer to recession and reducing demand for exportsfrom countries such as China and New Zealand.

Biggest Declines

Bank of Japan Governor Haruhiko Kuroda said last month he'dwelcome a lower exchange rate to help meet his inflation target andmay extend the nation's unprecedented stimulus program to achievethat. Like his Japanese counterpart, European Central Bank (ECB)President Mario Draghi has acknowledged the need for a weaker euroto avoid deflation and make exports more competitive, though he'sdenied targeting the exchange rate specifically.

After the Argentine peso, which is plunging following a debtdefault and devaluation, the yen will be the biggest loser amongmajor currencies by the end of 2015, according to median strategistforecasts compiled by Bloomberg as of yesterday. A 6.1 percentdecline is predicted, which would build on a 5.3 percent slidesince June.

The euro is also expected to be among the 10 biggest losers,with strategists seeing a 5.6 percent drop. The yen traded at106.92 per dollar 10:33 a.m. in London, while the euro bought$1.2695.

At 0.3 percent in September, annual inflation in the 18-nationbloc remains a fraction of the ECB's target of just under 2percent. Gross-domestic-product growth flat-lined in the secondquarter, while Germany, Europe's biggest economy, reduced its 2014expansion forecast this month to 1.2 percent from 1.8 percent.

Disinflationary pressures in the euro area are starting tospread to its neighbors and biggest trading partners. Thecurrencies of Switzerland, Hungary, Denmark, the Czech Republic,and Sweden are forecast to fall from 4 percent to more than 6percent by the end of next year, estimates compiled by Bloombergshow, partly due to policy makers' actions to stoke prices.

“Deflation is spilling over to central and eastern Europe,”Simon Quijano-Evans, the London-based head of emerging-marketsresearch at Commerzbank AG, said yesterday by phone. “Weakerexchange rates will help” them tackle the issue, he said.

Hungary and Switzerland entered deflation in the past twomonths, while Swedish central-bank Deputy Governor Per Jansson lastweek blamed his country's falling prices partly on rate cuts theECB used to boost its own inflation. A policy response may benecessary, he warned.

Currency Pegs

While not strictly speaking stimulus measures, the Swiss,Danish, and Czech currency pegs—whether official or unofficial—havea similar effect by limiting gains versus the euro.

Measures like these are necessary because, even after abroad-based dollar rally, eight of the Group of 10 developed-nationcurrencies remain overvalued versus the dollar, according to apurchasing-power parity measure from the Organization for EconomicCooperation & Development.

Some central banks have GDP, rather than inflation, in theirsights. That's particularly true of exporters, for whom a lowerexchange rate makes their goods cheaper.

New Zealand, where second-quarter annual inflation was thefastest in 2 1/2 years, announced last month its biggest currencyintervention in seven years, sending the local dollar to a 13-monthlow.

The so-called kiwi will drop 6 percent, to 75 U.S. cents, by theend of 2015, the median estimate of 33 strategists surveyed byBloomberg shows. That follows an 8.9 percent slide since mid-year,the third-biggest among 31 major currencies.

Goldman Sachs Group Inc. lowered its forecast for the shekel onOct. 6, citing the Bank of Israel's efforts to combat its firstslide into deflation since 2007. Its measures have included ratecuts and local-currency sales. Goldman Sachs sees the shekelfalling to 3.9 per dollar in 12 months, from 3.7438 today andcompared with a previous estimate of 3.66.

“Deflation is such a major part of the story that dealing withthat, by whatever means necessary, is key,” Simon Derrick, theLondon-based chief currency strategist at Bank of New York MellonCorp., said Oct. 17 by phone. “If that involves getting thecurrency lower, then so be it. You have to deal with it.”

–With assistance from Priyanka Sharma in London.

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