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Central Banks Playing Own Version of FX Monopoly

When the Plaza Hotel started selling its own version of Monopoly, the game board lacked a square to mark the 1985 currency accord named for the New York landmark.

“Plaza-opoly,” introduced this year, recognizes the hotel’s role as a location for the movies Home Alone 2 and North By Northwest, yet there’s no acknowledgement of the historic pact struck there by the largest economies to devalue the dollar.

Such a mention would have been timely reminder that exchange rates as a policy tool are coming back in style as they haven’t been since then. The difference now is that central bankers are looking to push inflation up rather than control rising prices.

“In just the same way that pegged currencies became a ‘trendy’ way to reduce inflation in days gone by, it is worth asking whether pegged currencies might become a trendy way to raise inflation,” David Lubin, head of emerging-markets economics at Citigroup Inc., said in a report this month.

As recently as July, Reserve Bank of New Zealand Governor Graeme Wheeler raised the possibility of currency intervention. Reserve Bank of Australia Governor Glenn Stevens calls the practice part of his “toolkit.” Analysts at Samsung Futures Inc. already suspect South Korea’s monetary authorities of seeking to curb the won’s appreciation.

Some central banks have already acted. The Swiss National Bank capped the franc three years ago in a bid to avoid deflation. A Bloomberg News survey of 23 economists this month found three-quarters say it will remain in place for at least another two years.

Czech Ceiling

The Czech National Bank followed with a ceiling on the koruna and this month promised to keep it in place until 2016 as the risks of slowing inflation outweigh a rebound from the longest recession on record.

Israel, home to what Lubin calls the best-performing currency in the past 18 months on a trade-weighted basis, may be the next to act.

“Now that the Israeli policy rate is only 0.5 percent, it is becoming more likely that any deflationary threat will need to be addressed through means other than the policy rate, and the shekel seems the obvious candidate,” said Lubin.

Other countries facing currency strength and low inflation are South Korea, Poland and Hungary. None have near-zero interest rates leaving with them time before having to act on currencies, said Lubin.

War Talk

It’s not only developing nations. Four years ago, Brazil accused to U.S. of starting a “currency war” to weaken the U.S. dollar and promote its exports.

If the European Central Bank begins quantitative easing and the euro tumbles, central banks in Sweden and Norway may even consider caps if they deem currency strength the biggest threat to price stability, said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London.

Minimum exchange rates “are not likely to becoming an overwhelming trend in the very short run, but we do think the debate” over them “will not go away,” said Lubin.

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