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Currency the Latest Threat to Global Economy: Q&A

Why is that bad?

A: A falling yen will help exporters, such as Sony and Toyota, and boost Japan's economy. And it will it tend to push prices -- and ultimately wages -- higher. But if other countries respond to the falling yen by devaluing their currencies -- to maintain the competitiveness of their own exports -- Japan will be back to square one and the world economy could suffer.

Sharp fluctuations in the value of currencies can hurt business confidence and investment. Prices for imported raw materials and components would be volatile, profits will be hard to come by as prices fluctuate wildly and the value of any investment a company makes in another country could quickly be wiped out.

Who's been feeling the effect of Japan's actions so far?

The euro, the single currency used by the 17-strong group of European Union countries, has seen the biggest move on the foreign exchange markets. As the region moved on from its crippling debt crisis last summer, the euro has slowly gained in value. But since the change of government in Japan, its value against leading currencies such as the yen and U.S. dollar has shot up -- last December it was worth 113.19 yen and $1.29 and now it's at 124.93 yen and $1.33.

A rise in the value of the euro will do little to help the eurozone's businesses -- and will hardly help getting it growing again. Figures Thursday showed that the economic output of the region shrank at an annualized rate of around 2.5% in the last quarter of 2012.

What's been the reaction from other major economies?

Politicians have voiced concerns about the euro's rise versus other major currencies -- most notably French President Francois Hollande, who indicated he was open to calls for a more managed exchange rate. European Central Bank President Mario Draghi said last week that the bank will monitor the economic impact of the euro's rising value. Several analysts took that to mean the ECB could cut interest rates to bolster growth, which in theory could weaken the euro -- an indirect tit-for-tat response to the yen's fall, some say.
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