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April 1, 2013

On Alert

Overblown or Not, Feared 'Currency War' Keeps FX Traders Busy

By Gregg Wirth

Japan is actively devaluing its yen. Other nations threaten to retaliate, in kind, to stimulate their own economies through cheaper exports. A global currency war could wreak havoc on many smaller economies and stall out the budding recovery under way in larger ones ... or not.

And it is that "or not" part that worries and delights some foreign exchange trading desks. They may be salivating about the increasing trading activity all this "currency war" talk is generating, but at the same time, they also have to deal with fretful currency investors.

"The phrase 'currency war' may be overblown, especially compared to the massive swings we saw in the currency markets in the 1980s and '90s," said Collin Crownover, senior managing director and global head of currency management at State Street Global Advisors, which has 16 portfolio managers dedicated to currencies, and about $100 billion in currency assets under management. "I think the term now means more political posturing by governments that don't want to lose export market share to their neighbors." 

Colin Crownover, State Street

The term "currency war" has come to mean a competitive devaluation of currencies among several countries, each seeking to spark economic growth through increased exports goosed by their weakened currency. When one or two countries pursue these devaluation policies, it can work to benefit that country even though there are dangers of inflation and continued economic weakness. However, when the entire world is drawn into similar action, a free-fall of currencies and economies can occur that is often difficult to reverse.

The same is true, several currency traders said, in the FX market. If one or two countries send their currencies down, you have trading opportunities; if too many others follow suit, you can have a meltdown. And, should this playing-with-fire approach to global currency negotiations, which many world leaders seem eager to engage in, actually spread out of control and cause widespread economic catastrophe, even the most fleet-footed FX investors might not escape the carnage with their portfolios intact.

Pound Protection

Some trading desks are fielding desperate questions from investors as to which way to bet or hedge and on which currency. "And throwing terms like 'currency war' around only adds to the anxiety," said Glenn Uniacke, head of options at FX specialist Moneycorp. "Anything with the word 'war' after it can't be good to work with or to ease fears."

Uniacke said that Moneycorp, a U.K. firm that provides foreign exchange services for individuals and corporate clients, is trying to calm its British clients who are seeing the pound take a beating in recent weeks and are worried the free-fall isn't over yet.