The head of the International Monetary Fund Dominique Strauss-Kahn has warned that governments risk a currency war if they use exchange rates to solve domestic problems.
Strauss-Kahn’s comments come after the yen fell last week after the Bank of Japan engaged in quantitative easing, which saw it cut its interest rates and propose a new fund to buy government bonds and other assets.
The yen dropped against the dollar early last week after the BoJ announced the decision. Government bonds, stock and gold prices all rose on the consensus that the central banks of other leading econ-omies would follow Japan in embarking on the latest round of quantitative easing.
Speaking to the Financial Times last week, Strauss-Kahn said: “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon.
“Translated into action, such an idea would represent a very serious risk to the global recovery. Any such approach would have a negative and very damaging impact in the long run.”
The past few weeks have seen a number of leading econ-omies take action to relieve upward pressure on their currencies.
Strauss-Kahn said: “We have seen reports that some emer-ging countries whose econ-omies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side. I do not think that is a good solution.”