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Q&A: Currency The Latest Threat To Global Economy

By PAN PYLAS

LONDON (AP) â¿¿ The world economy faces a new threat. Instead of a banking collapse or too much debt, fears are growing that countries are using their currencies as an economic weapon.

History suggests that's never a good thing.

If too many countries try to weaken their currencies for economic gain â¿¿ sparking a "currency war" â¿¿ that could stifle business confidence and investment, sow turmoil in financial markets and derail a fragile global economy.

Financial representatives from the world's leading 20 industrial and developing nations are gathering in Moscow for a meeting this weekend that looks set to be dominated by these concerns and they will have their work cut out to douse the fires.

Why is everyone talking about currencies?

â¿¿ Since the start of the financial crisis, central banks around the world have been trying to stimulate their economies by keeping interest rates extremely low. The goal is to encourage consumers and businesses to borrow and spend more. One way central banks drive down rates is to use their power to print money to buy up large quantities of bonds. But by boosting the amount of currency in circulation, there is a side effect: it can drive down the value of that currency relative to others.

As a country's currency falls, its exports become cheaper, while those of its neighbors become relatively more expensive.

Japan, the world's third-largest economy, is currently under the harshest spotlight. To get its economy motoring again after a two-decade bout of stagnation, the government has said it would like to see inflation move higher. Markets have interpreted this as a signal that Japan's central bank is prepared to take actions that would result in driving down the yen, to boost exports and also put upward pressure on prices. Earlier this week, the yen fell to a 21-month low against the dollar and a near three-year trough against the euro.

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