Earlier this week, the volatility in the currency markets prompted the Group of Seven leading industrial nations, which includes the U.S, Germany as well as Japan, to warn about the effects of volatile movements in exchange rates.
Might other countries try to manipulate their currencies in response to Japan?
— There is no sign of that — so far. Speaking in Moscow Saturday, International Monetary Fund Director Christine Lagarde dismissed the possibility of an international currency conflict, saying that she was witnessing ‘‘currency worries, not currency wars.’’
But a country fixing the value of its currency is not without precedent.
In Sept. 2011, Switzerland took action to arrest the rise of its currency, the Swiss franc. The rise was triggered by the debt crisis in the eurozone — investors were looking for somewhere safe to park their cash and the Swiss franc has traditionally fulfilled that role. The Swiss intervention was viewed as an attempt to protect the country’s exporters.
U.S. politicians have for years accused China of keeping its currency, the renminbi, artificially weak in order to industrialize fast. And many countries believe the U.S. long ago abandoned the ‘‘strong dollar’’ policy in a dash for growth.
How bad could a currency war get?
— Since World War II, one of the key objectives of international economic policymaking has been to avoid a repeat of the 1930s, when countries around the world engaged in a tit-for-tat battle with their exchange rates. That decimated global trade, accentuating the depression and providing another catalyst to war.
Assuming the world doesn’t descend into a similar abyss, a currency war can still harm the global economy. For example, central banks, particularly in the developing world, may resort to controlling the amount of capital that can be moved out of a country to affect exchange rates.
‘‘Increasing impediments to the free flow of capital might be thought to lower the potential growth of the world economy,’’ said Stephen Lewis, chief economist at Monument Securities.
Can the world’s leaders and central bankers calm the situation?
— As many analysts had expected, this weekend’s G-20 meeting in Moscow finished on Saturday with a warning on the dangers of competitive devaluations and a pledge that it will ‘‘not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.’’
The G20 communique — and the G7 statement earlier this week — failed to single out one country’s actions for criticism.
Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said that should come as no surprise.
‘‘Many countries including China, Japan and the United States all have issues related to exchange rates,’’ he said. ‘‘People in glass houses should not throw stones.’’