No real currency yet in talk of 'currency wars'

While those central banks engaged in the practice are quick to say they are not seeking currency depreciation, suspicions linger that they are not unhappy with the positive impact on competitiveness of a weaker exchange rate.

Swiss approach

If the central bankers who are engaging in quantitative easing (QE) can just about maintain a level of plausible deniability on exchange rate manipulation, the Swiss central bank cannot. It has taken the most radical action to date.

As the Alpine state became a safe haven from the euro crisis, money flooded into Switzerland, causing its currency to appreciate (the “price” of a currency rises if demand for it rises, just like any other price).

Not only was this threatening the export-dependent economy, but the effect on import prices risked triggering a deflationary spiral (just as a stronger currency makes exports uncompetitive in trading partners’ currencies, it makes imports cheaper in local currency).

In order to prevent the franc rising any further, the Swiss central bank announced in 2011 that it would engage in unlimited intervention in currency markets to maintain a ceiling of €1.20 to the franc.

Despite the explicit nature of the move, Switzerland has come in for little criticism and has certainly not been accused of currency warfare, given that the Swiss authorities were not trying to weaken their currency as much as trying to stop its destructive strengthening in the midst of a crisis in the euro area by which it is surrounded.

But if the Swiss have been excused their interventions, no monetary authority is more in the clear on currency manipulation than the European Central Bank.

Although it has certainly engaged in actions that are very far from orthodox, such as buying government bonds, it remains the most conventional of all the major central banks.

Thus far at least, it has eschewed the QE option and has maintained a purist position on markets determining exchange rates. The decision not to use instruments that cause currency weakening is very likely to have played a big part in keeping the external value of the euro strong against most other currencies even at times of existential crisis for the euro.

But for all the talk of currency wars, it remains largely just talk. If monetary authorities around the world were truly engaged in acts hostile to their neighbours and trading partners, foreign exchange markets would be showing much bigger movements in prices and volumes. The truth is that central bankers know that engaging in competitive devaluations is a beggar thy neighbour tactic, which can be easily and quickly copied by neighbours. A tit for tat cycle of ploys to push down currencies would end in the beggaring of all, as happened in the 1930s.

Sometimes the lessons of history are well learned. They appear to have been in this case. The worst that has happened to date has been the occasional currency skirmish. It is very unlikely that more serious hostilities will break out.

Exchange rate regimes Fixed, floating, managed and unified

Until 1971, governments controlled their currencies’ value against others because the economic consensus held that exchange rate volatility negatively affected economic activity generally, and international trade most specifically.