As the U.S. dollar continues to depreciate, many other economies are being forced to intervene in the foreign exchange markets to devalue their own currencies. The world's main economies are trapped in a likely "currency war," which might hamper the recovery of the world economy.

Definition of "currency war"

Traditionally, a currency war refers to the situation where one nation, relying on its strong economic power, buffets its competitors and seizes other nations' wealth through monetary and foreign exchange policies.

It is a form of economic warfare with cold premeditation, specific purpose and considerable destructive power.

However, there is no obvious evidence that many countries are conducting a "currency war" in this sense.

Actually the meaning of the so-called "currency war" right now is much more simple and specific: some nations, which are facing internal economic difficulties, devalue their currency to simulate exports and create more jobs. If more and more nations adopt this kind of foreign exchange policy, the interest conflicts between them will get worse, damaging the recovery of the global economy.

The current situation is far from a war, although there is more conflict between nations' monetary policies. The Western media's hyping of a "currency war" has exaggerated divisions on currency policies and brought more tension to the international community.

U.S. is culprit of "currency war."

It appears the cause of a likely "currency war" is the upgrading of conflicts on the RMB exchange rate between the United States and China.

Some other main economies also took action in this "war." The Japanese government launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil, South Korea and Singapore also used guerrilla tactics of doubling taxes on capital inflows to stop their currencies surging, which also played an important role in fueling a possible "currency war."

Yet the real cause of the likey "currency war" rests with the United States.

Firstly, the United States is facing a sluggish economic recovery and high unemployment, and the economy has been a major issue of the Nov. 2 midterm elections. Many U.S. politicians have the impulse to use the RMB exchange rate issue as a scapegoat for the weakness of U.S. economy. They highlighted the question of the yuan's exchange rate and intensified the dispute, making the the RMB seem the eye of the storm.

Secondly, the root cause is the Federal Reserve's massive printing of money in response to the financial crisis. The Fed adopted expansionary fiscal and monetary policies and infused massive liquidity into the market, which caused depreciation of its currency.

The result is that other related countries, such as those in South Korea, Brazil and Singapore, will face pressure to appreciate their own currencies versus the U.S. dollar, posing challenges to their export and financial security. These countries are forced to intervene in foreign exchange markets to hold down their currencies, thus forming a latent "currency war."

What should be noted is that the United States has adopted a "double standard": in the eyes of some U.S. politicians, it is reasonable for the Fed to "print money" to devalue the dollar but illegal for other countries to hold down their currencies to maintain their economic and financial security.

"Currency war" destroys world economic and financial stability

If a real "currency war" breaks out, it will seriously affect global economic and financial stability.

If the Fed continues to "print money" in the world's largest economy, it will lead to excess liquidity, deprecation of the dollar, and finally serious speculation of hot money.

The typical result is like this: if governments do not intervene in the market, a massive influx of dollars as hot money will generate new bubbles in stock and real estate markets of emerging and developing economies. And if the governments mop up the hot money by "printing money", inflation is likely.

Depreciation of the dollar may also cause commodity prices to surge. Situations like soaring oil prices and food crises will return. More importantly, if all nations adopt the foreign exchange policy of "beggar thy neighbor", the global economy will face a severe challenge.

During the 1930s economic crisis, many major economies abandoned the gold standard and devaluated their currencies, which led to protectionism and further harmed the economic recovery. It is a painful lesson.

China should be wary not to be smeared

Currently a few western media are trying to distort the cause of and solution to the "currency war" and China is in danger of being discredited.

As previously mentioned, the real cause of the "currency war" is the U.S. politicians' electioneering and money printing by the Fed. Still, some American politicians and a few Western media not only distort the truth, but also press China to take the responsibility or even discredit China.

Some people even proposed that as a "responsible stake holder," China should accelerate the appreciation of RMB to avoid the outbreak of a "currency war."

As an old Chinese saying goes, he who ties unties. The RMB exchange rate is not the main cause. Instead, if the RMB appreciates too fast, it will only do harm to China's economy and further hurt the global economic recovery.

Even a large appreciation of the RMB will not solve the problem. Other emerging and developing economies will continue to face pressure to intervene as their currencies appreciate in the face of the Fed's "money printing" policy.

Int'l community should cooperate to tackle problem

To avoid a "currency war," all nations should learn from the lessons of the 1930s Great Depression and cooperate with each other.

At the beginning of the outbreak of the financial crisis, the international community worked together, which was encouraging.

As the world economy underwent sustainable recovery, the situation began to shift. Trade protectionism rose and divisions emerged over macro-economic policies such as exchange rates, financial regulation and reform of international financial organizations.

People now doubt whether the international community can make joint efforts to solve the difficulties.

While the world moves towards a sustainable recovery, there remain many potential risks and challenges, so it is urgent for the international community to beef up policy coordination.

In addition, the threat of a "currency war" highlights the dilemma of the current global currency system. As a sovereign currency, the U.S. dollar also functions as the world's main reserve currency. Unfortunately, the two functions are contradictory. To stimulate its economy, the Fed resorts to printing more money, which may cause excess liquidity and depreciation of the dollar, further affecting international financial stability. A new international monetary system is urgently needed.