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Currency the Latest Threat to Global Economy: Q&A

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 that volatile movements in exchange rates could adversely hit the global economy and to reaffirm their commitment to market-driven exchange rates.

Might other countries try to manipulate their currencies in response to Japan?

A: There is no sign of that -- so far. But fixing the value of a 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.

For years, U.S. politicians have accused China of keeping its currency, the remnibi, artificially weak in order to industrialize fast. And many countries believe the U.S. long ago abandoned the "strong dollar" policy at the core of the Clinton administration's economic policy in a dash for growth.

How bad could a currency war get?

A: 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?

A: No doubt, a communique will emerge from this weekend's G-20 meeting in Moscow that pours scorn at competitive devaluations. Most of the action, though, is likely to take place behind-the-scenes with pressure expected to be put on the Japanese finance minister and central bank governor not to allow the yen to fall much further.

"Expect smoke and mirrors," said Simon Evenett, a professor of economics at the University of St. Gallen in Switzerland and a former World Bank official. "It's not the G-20's style to point fingers."

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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