A counteroffensive of sorts may be underway this year in what has seemed like a one-sided global currency war as developing economies slow, western money-printing pauses and the heat comes out of pumped-up emerging market currencies.
The three-year-old war, as Brazil dubs the devaluationist policies of developed nations seeking relief from home-grown credit crunches, may well just come full circle and burn itself out as a result.
But the reverse course of emerging currency depreciation carries its own significant risks, from skewing investment decisions to aggravating trade diplomacy.
What's more, it's Japan's success this year in finally weakening its supercharged yen, by fresh rounds of money-printing from its central bank, which may prove pivotal by disturbing the delicate balance in Asia.
Some economists warn the yen's more than 10 percent retreat since January is already forcing China's hand on its own controversial policy of yuan capping in a way that could cause consternation in Washington in an election year.
Far from seeing a sharply rising yuan emerge from China's policy of greater exchange rate flexibility - core U.S. and multilateral demands - the yuan has actually weakened this year as China's economy and inflation rates slow, its trade account worsens and fears of a hard landing there persist.
Even though the tightly-controlled yuan has gained more than 10 percent against world currencies over the past five years, it's one of the few major emerging market currencies to remain lower against the U.S. dollar so far in 2012. Bouncing back smartly from a dire 2011, Russia's rouble, India's rupee, Mexico's peso and South Africa's rand are all up 5-10 percent.
BRIC currencies since 2007: http://link.reuters.com/guv27s
Currency performance in 2012: http://link.reuters.com/tak27s
Chinese yuan vs Japan yen: http://link.reuters.com/raj46s
China trade in deficit: http://link.reuters.com/gar96s
Japan exports to China vs US: http://link.reuters.com/daj46s
China recorded its biggest trade deficit in more than a decade in February and signs of slowing economic activity are mounting in everything from real estate prices to ore demand to foreign direct investment. But if it allowed or engineered a lower yuan, then it's unlikely the other emerging giants - never mind the west - could ignore that.
Long-term global markets bear and Societe Generale strategist Albert Edwards says it's vitally important global investors put the possibility of a weaker Chinese yuan on their radars because consensus thinking is disregarding the risk.
The renminbi devaluation option is widely ignored by the markets in the same way they ignore the likelihood that the Chinese economy is hard landing, said Edwards. The devaluation option should be seen as 'in play' however unthinkable it is believed to be at present.
SUCKING CHINA INTO FIGHT
Edwards said the tight interdependency of regional economies in Asia means it's impossible to ignore the interplay of currency rates there. And he added that the yen's steep weakening from then historic peaks in 1995 through 1997 was a major trigger for the devastating Asian currency crises and financial collapse that followed in 1997 and 1998.
Neil MacKinnon, economist at Russian bank VTB Capital, reckons that if you view the currency wars as an attempted devaluation of G7 currencies en bloc against the emerging markets, then it now may be time to be wary of the latter.
The Chinese certainly have less of a stomach for yuan strength at this stage and the relative growth story has shifted now overall for emerging currencies, he said.
What's more, Stephen Jen of hedge fund SLJ Macro Partners said if you look at the 15 percent wage inflation in China of recent years rather than more modest goods price inflation, then the yuan may already be at equilibrium and more two-way risk is in store. It's no longer clear the yuan is undervalued.
The question then is whether it's possible for investors to stay bullish on emerging markets while sceptical on China.
A monthly survey of fund managers by Bank of America Merrill Lynch released on Tuesday showed funds still heavily overweight emerging equities. However, while expectations for global growth improved this month, the outlook for China fell.
But the currency equation should be critical. UBS estimates that over the past decade currency moves contributed an average 46 percent of total return during seven of the years where total returns and currency return were positive.
And moves had as much to do with trends in the dollar as any view on local currencies. Of 22 main emerging units, 11 recorded gains of more than 10 percent against the greenback in that time, but only three currencies - from Brazil, China and Peru - recorded gains of 10 percent on a nominal trade-weighted basis.
So, if the dollar is poised to recover on a stabilising U.S. economy and rising U.S. Treasury yields, the betting on emerging currencies is complicated even further. UBS reckon emerging currencies still look good on a 1-3 year horizon but there may be lots of bumps in the meantime.
In the coming weeks and months, we believe we are more likely to hear rhetoric about currency wars rather than inflation wars - which is why today we have a tactical short term call to be long U.S. dollars, UBS economists told clients last week.
(Graphic by Scott Barber; Editing by Ruth Pitchford)