It’s amazing how a catchy expression fires the journalistic imagination. Brazil’s finance minister used the expression last week — one assumes in order to get the issue on the table at this week’s G20 IMF meeting. But from some of the reporting, you would think the war was in full swing.

What is actually happening?

The USD is very weak because of the extraordinary monetary policy actions the authorities have taken during the crisis. With the prospect of further QE in the US, the USD is weakening again. This has led the Japanese, whose currency tends to be strong in a crisis, to engage in a bit of intervention, albeit not very much. It is hardly a war.

Brazil has imposed further capital controls because the money created by QE in the developed world has a tendency to find its way into emerging markets, which it finances credit booms and stokes inflation. The Brazilians, understandably, would prefer not to have destabilising hot-money inflows, and this is presumably what they want to talk about at the G20 IMF. Again, not much of a war.

The only actual fight that is going on is between China and the rest of the world. China pegs its currency to the USD in order to support its export industries, which are a vital part of the national economy, at the expense of manufacturers in the US and elsewhere in the world (including Brazil). Chinese leaders say that there will be social unrest if export industries suffer a slowdown; but this is partly just scaremongering to get their own way, and their export- and investment-based economy can’t keep going forever. Eventually, it will need faster domestic consumption growth. One can’t help but think that by allowing a measured appreciation of their currency with the eventual objective of a free-floating exchange rate, the Chinese could encourage exporters to turn their attention to domestic customers. At the same time, consumer goods produced abroad became cheaper in China, which would presumably be good for consumer spending. But for all that Western observers tend to think the Chinese government is omniscient, the Communist Party does not seem to have much of a plan for rebalancing the economy. It is focussed on keeping economic growth racing along, by hook or by crook, for fear that if growth even slows down it will face widespread social unrest. For that reason, negotiation will not get the rest of the world very far; China needs to be pressurised into making a change. World leaders seem to be waking up to this reality. The US administration and voices in the EU have been getting firmer with China of late — and Brazil has started talking about a “currency war”.

Why not just come out and say what they are thinking? Because then the Chinese could not back down — they are terrified of “losing face”. Changing their policy to help avert a “global currency war”, superficially in cooperation with other countries, would be a much more likely move.

Update: George Soros also focuses on China.