"...Over the past few weeks we have seen the beginnings of trade war, which in reality had been going on for years. The statements by Chairman of the Fed, Bernanke, and statements as well by Treasury Secretary Geithner, started the ball rolling. The discussion of a possible QE2 set off wild currency volatility with the dollar falling the most and the yen, euro and Aussie dollars being the strongest. The Swiss franc shared leadership with the yen. While this transpired Mr. Geithner told the world the government wanted a strong dollar and that its lower level was just about right.
The significance of currency war is that inevitably leads to trade war. You might call it a backdoor entry. The string of competitive devaluations over the years were overlooked and tolerated by the US because cheap foreign goods held down US inflation and the dollars purchased to subdue domestic currency value were used to buy US Treasuries and Agencies. That benefit was now of limited benefit as nations bought less Treasuries and the Fed had to monetize US Treasury debt. This has and will continue to bottle up inflation to a larger degree in the US, as less hot US dollar flow goes into foreign countries. Countries such as Brazil have already implemented a tax on dollar flows into their country. We can expect more countries to follow and that will be followed by US trade taxes on goods and services. We have already started to see this in goods sold in China and the US. The US wants to increase exports and a weaker dollar makes that happen..."
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